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Spain's Role in Economic Ties Between Asia and Latin America Large Companies, SMEs and the City of Barcelona as Bridges Between the Two Areas

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Spain’s Role in Economic Ties Between Asia and Latin America Large Companies, SMEs (Small and Mediums Sized Enterprises) and the City of Barcelona as Bridges Between the Two Areas

© Casa Asia / INSEAD / Ajuntament de Barcelona Depósito legal: B. 9136-2012 ISBN: 978-84-936363-8-8 Edited by: Casa Asia www.casaasia.es INSEAD www.insead.edu Designed by: Casa Asia Printed by: Masanas Gràfiques Barcelona, December 2011


Spain’s Role in Economic Ties Between Asia and Latin America Large Companies, SMEs (Small and Mediums Sized Enterprises) and the City of Barcelona as Bridges Between the Two Areas

Director of Study: Lourdes Casanova

Teacher at the Strategy Department, INSEAD lourdes.casanova@insead.edu

Main Researcher: Eduardo RodrĂ­guez Montemayor ELab Senior Researcher, INSEAD eduardo.rodriguezmontemayor@insead.edu

Coordinator: Jorge Fuentealba

Director of Latin American Observatory of Asia-Pacific, Casa Asia jfuentealba@casaasia.es


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Spain’s Role in Economic Ties Between Asia and Latin America

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Prologue Acknowledgements Executive Summary

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Chapter 1. From G8 To G20: The New Global Order and the Links Between Asia And Latin America    1.1 Global Trends 1.2 Trade Between Asia and Latin America 1.3 Trade Agreements Asia - Latin America 1.4 Direct Foreign Investment Flows

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Chapter 2. Business Cases Alfa Hogar BBVA Cemex Farmaegara Ficosa International Garrigues Miguel Torres S. A. Port de Barcelona Repsol YPF Singapore Airlines Telefónica

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Chapter 3. Types of Bridge: Analysis of Business Cases 3. 1 Definitions 3.2 Summary of the Business cases

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39 43 53 57 61 69 75 80 86 92 96 104 104 107


Contents

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Chapter 4. The Role of the Cities 4.1 The city of Barcelona as a bridge 4.2 Headquartes of Asian and Latin American companies in Spain

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Chapter 5. Areas of Opportunity in the Future 5.1 Movement of People: Tourism 5.2 Cultural and Educational Exchanges 5.3 Renewable Energy 5.4 Infrastructure and construction

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Chapter 6. Recommendations

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Legal Annex The legal and tax advantages of channelling Chinese Investment in Latin America through Spain

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Bibliograpghy

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121 123 128 134


Prologue

Prologue In a context of growing links between emerging countries, the presence of economies such as India, South Korea and Singapore has risen dramatically in Latin America, while investment and credit from China in the region have increased. The Asian irruption in Latin America elicits much interest in Spain. In 2006, Casa Asia, together with the Barcelona Centre for International Affairs (CIDOB), decided to conduct a study on new opportunities in Latin America. This paper, authored by economist Jacinto Soler Matutes, includes cases of ten companies, mostly large companies, which are present in Asian countries, Spain and Latin America. This work has shown that the bridge role Spain can play between the two areas has become a reality in many cases. Five years after that first study, the global economic outlook has changed dramatically. The crisis, which affects mainly the developed countries, makes the global economic power move increasingly to the east and south, while the process has accelerated rapprochement among the aforementioned emerging nations. In this new context, the emerging opportunities in the field of relations between Asia-Pacific and Latin America have risen sharply, since these are two of the fastest growing areas of the planet. Spain has the advantage of having a strong presence in Latin America and, therefore, Spanish companies are in a strong position to seek Asian and Latin American alliances. This bridging function may be particularly strong and feasible in those sectors where Spanish companies are leaders as the various sections of this paper confirm. On the other hand, in the latter study it was considered appropriate to include cases of small and medium-sized Spanish companies have already learned to play the role of bridge between the two areas, and have done so successfully. I am confident that the cases presented here can serve as examples to other SMEs on their way to international expansion. Also it seemed necessary to learn about the

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Prologue changes between 2006 and 2011 through the evolution of some cases covered in the previous study, so that this work includes new analysis of three companies: BBVA, Telefónica and Ficosa. At the same time, from the cooperation of the City Council of Barcelona for this study emerged the idea of deepening the role of bridge between Asia and Latin America that can also be played by the cities, since they are increasingly important for the development of countries. The case of Barcelona is particularly relevant both for its strategic location as for a number of initiatives related to innovation and greater international presence. The different approaches to the study of “triangulation” Asia-Spain-Latin America in business will enrich our knowledge of the real opportunities that exist. I wish to express my sincere thanks to all who have contributed to this study and, especially, INSEAD, the City Council of Barcelona, Garrigues and the Universitat Pompeu Fabra for their valuable collaboration. Juan Jose Herrera de la Muela Director General of Casa Asia


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Acknowledgements Lead researcher would like to especially thank Eduardo Rodriguez Montemayor for his excellent research work and writing and to Jorge Fuentealba for his contribution of content and coordination with companies and institutions that collaborated in various stages of preparing the report. We sincerely thank the collaboration in this study of Carlos Arsequell of Singapore Airlines; Ángela Castaño of the Spanish Tourist Office; Ignasi Castelló of Ficosa; Josep Maria Cervera of the Barcelona Chamber of Commerce; Margaret Chen of Telefónica; Ignacio Cobisa of Telefónica; Albert Collado of Garrigues; Maribel de Luis of Repsol; Pere Feliu of Farmaegara; Santiago GarciaMilà of Port de Barcelona; Carles Murillo Fort of IDEC-Universitat Pompeu Fabra; Álvaro Ortiz Vidal-Abarca of Cemex; Judith Padrós of the Barcelona Chamber of Commerce; Victoria Rodriguez of BBVA; Judith Romera of the City Council of Barcelona; Carles Rua of Port de Barcelona; Francisco Soler of Garrigues; Josep Maria Tarragó of Ficosa; Mercedes Temboury of Telefónica; Antton Tomasena of Alfa; Jordi Torrent of Port de Barcelona; Manuel Torres of Garrigues and José Carlos Vicente of Repsol. We also thank Dolly Catalina Giraldo and Pamela Benavente Chen, students of Master in International Business at IDEC-Universitat Pompeu Fabra, who helped in collecting data for the compilation of Chapter 1, and the support team of research and development at INSEAD.


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Executive Summary This report examines several business cases which purpose is to show that Spanish companies play and can still play a role as a bridge between Asia and Latin America. Emerging areas have the highest growth in a context of great crisis in the West and are the saviour for Western companies. The companies studied are of various sizes, from different sectors and have a role as a bridge between both continents, often associated with Asian companies. Moreover, companies in Asia or Latin America consider Spain a junction with the other continent. Other important aspects are also included such as the role of cities, which is increasingly important in economic development, and we have furthered studied certain areas with special potential that the country should develop in the future. The work is divided into six chapters: Chapter one offers an economic outlook about the importance of trade and investment links between Asia and Latin America in a context of booming emerging nations. Chapter two presents eleven business cases analyzed in alphabetical order: Alfa, BBVA, Cemex, Farmaegara, Ficosa, Garrigues, Port de Barcelona, Repsol, Singapore Airlines, Telef贸nica and Torres. The aim of each case study is to describe the international expansion of each company and its way of being a bridge between Asia and Latin America. Chapter three offers a definition of bridge types identified in the previous section and summarizes the business case indicating the type of bridge, the mechanism by which it works and its aim. Chapter four analyzes the role played by cities, particularly Barcelona, as centres of economic development, as bridges and as potential headquarters of Asian or Latin American companies.


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Executive Summary Chapter five explains some areas to be developed in the future in which Spain has a potential as a vertex of the relations between Asia and Latin America such as tourism, cultural and educational exchanges, renewable energy and infrastructure and construction. Finally, in conclusion, chapter six offers recommendations for both the public and the private fields. An appendix is also included which explains the legal and tax advantages of channelling Chinese investment in Latin America through Spain. Some of the recommendations in chapter six are: Advantages in costs, possibilities of SMEs. For Spanish companies looking to internationalize, it is essential to have a business model that combines the cost advantages and access to growing markets. Access to other markets. Spanish companies must be able to find new markets, identifying needs in Latin America and in Asia and look for the best way to meet those needs, as exemplified in cases such as Miguel Torres or Alfa Hogar. Knowledge of Latin America to search for partners and Asian funding. This knowledge is an asset to Spanish companies seeking Asian partners to develop projects in Latin America in areas such as infrastructure, construction and development of renewable energy. Repsol YPF, for example, has used its inclusion in its natural market in Latin America to obtain financing from a Chinese giant. This is what Spanish companies should seek in areas that require large investments to develop projects which funding can be undertaken by firms and Chinese banks.


Executive Summary

Prospects for innovation. Asia is a major centre of innovation and Spanish companies should seek to bring Asian innovation into the Latin American market. They should also seek to focus their cooperation between Asia and Latin America in the innovation taking place in these regions. This, together with the Spanish innovation, can result in a fruitful exchange of experiences and solutions across three continents. The field of renewable energies, in which Spain has a strong international presence, can be a particularly fertile field in this innovation to three parts. Finally, cities like Barcelona already play an important role to be strengthened in the near future.

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Chapter 1. From G8 To G20: The New Global Order and the Links Between Asia And Latin America The explosive growth of large emerging countries like China and India, whose Gross Domestic Product (GDP) have grown at an average annual rate of 10.3% and 7.1% respectively, over the past 10 years,1 is a reflection of the recent re-balance in the weight of the world economy towards emerging economies. Although attention typically focuses on Asia, Latin America has been quietly constructing its own story of growth. In the G20, the multilateral forum that has emerged after the great crisis, which has replaced the G8, three Latin American countries are represented: Argentina, Brazil and Mexico. In 2011, Brazil became the world’s sixth largest economy in terms of GDP.2 Coupled with the strong economic growth in both regions, Asia and Latin America, who simply traded in the past, have become, in the space of ten years, large-scale commercial partners. While there are countries like China that are key to the growth of this trade route, trade has expanded across several countries. However, it remains important to emphasize the role played by China. Institutions such as the Inter-American Development Bank (IDB, 2010) indicate that between 2000 and 2008 trade between China, Latin America and the Caribbean has grown at a dizzying rate of 31% annually. In this chapter we present an analysis of trends in trade links between Asia and Latin America. The recent commercial closeness between the two regions is supported by the boom in their economies, which have remained strong even after the great international financial crisis that was detonated in late 2008. Trade relations have become highly evident in (i) international trade of goods and (ii) in the flow of direct foreign investment (DFI). Several Asian countries, especially China, are positioned today as major trading partners in countries like Brazil, Chile and Peru. Moreover, although the participation of Latin America in Asian trade is still modest, it has grown rapidly, particularly in the supply of raw materials like copper, iron ore and soybeans. The annual average is calculated from growth statistics published by the IMF in its World Economic Outlook, October 2010. 2 Centre for Economics and Business Research (CEBR). December 2011. 1


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

It is important to underline the heterogeneity that exists among the trade links of the various Latin American and Asian countries. Countries like Mexico also maintain, like Brazil or Chile, major trade flows with Asia in terms of the value of goods traded, but in relative terms to the total international trade, Asia is still a minority business partner (compared to the US). Although many of the recent commercial trends at the regional level are subsumed under the label of ‘Latin America’, as there are certainly many similarities in the characteristics of trade relations with Asia, we also seek to present the particularities of each country in terms of the most important sectors for trade with Asia as well as the trade agreements that each country has brought to fruition with countries in the Far East. Also, when we talk about Asia, we generally focus on some countries we consider as key. China and Japan top the list, given the size of their economies (being the second and third largest world economies respectively) and their prominent place in global trade (first and fourth largest world powers in exports in 2009, according to ECLAC 2010).3 India and its rapid growth can create new trade links with Latin America in sectors other than those held with countries of East Asia, Latin America exports raw materials and typically, Asia, manufacturing, and India can also boost trade in services. Although bilateral trade and investment have not yet achieved considerable importance, investments from Indian technological companies like Tata Consultancy Services have grown considerably over the past five years. 1.1 Global Trends The latest trends in economic grow th around the world show how the emerging countries have been converging, albeit slowly, towards the level of development of the advanced countries. In Figure I, note that the largest developed countries that form the G7 grew less than 2%, on average, between 2000 and 2008, before the severe contraction in GDP that occurred in 2009. While the G7 countries, along with other developed countries, managed to revive growth in their economies in 2010, recovery has not been as vigorous as in emerging countries. In fact, countries 3 Other countries with commercial potential are Indonesia (mainly due to the size of its market), the Republic of Korea (which is an important trading partner of Latin America), Malaysia, Singapore and Thailand.

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like China and India were largely unaffected by the global economic crisis and kept GDP growth rates above 6%. Figure I. Gross domestic product growth by region (at constant prices)

Source: Compiled from the database of the report World Economic Outlook, October 2010 from the International Monetary Fund. Note: The G7 includes the following countries: USA, Japan, Germany, France, Britain, Italy and Canada. LATAM includes all the countries of Latin America and the Caribbean.

In its annual report, The Global Economic Panorama, the IMF maintained its growth forecast for 2011 and 2012 as 4.4% and 4.5% respectively, indicating that the recovery is gaining strength despite increased risks (which according to the report, are derived from rising oil prices, and inflation in emerging economies). The fastest growth continues to come from emerging economies, China is expected to lead the way with growth of 9.6% this year, followed by India, where an increase of 8.2% is expected. Meanwhile, the U.S. is forecast to grow 2.8% this year and 2.9% in 2012. 1.2 Trade Between Asia and Latin America The commercial rapprochement between Asia and Latin America has accelerated in both directions: an increasingly important proportion of Latin American


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

exports are to Asia as a destination, while Asia also increasingly exports to Latin American countries. Although the US continue to have a primordial role in bilateral trade with Latin America, Figure II shows that their relative importance has declined in contrast to Asia. Part of the strength in the commercial bond between the two regions is due to the increasingly prominent role some emerging countries are taking in the global arena, particularly after the crisis. Figure II. Latin American exports by region selected: % of total exports that are destined for the US and Asia.

Source: Authors’ calculations based on COMTRADE database of the United Nations (http://comtrade.un.org/). Note: Latin America including Caribbean countries. Asia includes the following countries: China, India, Indonesia, Japan, Malaysia, Republic of Korea, Singapore and Thailand.

According to a press release from the World Trade Organization (WTO) on April the 7th, 2011, the volume of imports to Brazil, Russia, India and China experienced very rapid growth in 2010: 43% Brazil, 39% China , 30% Russia and 25% India. In terms of exports by volume, the highest were China (28%), Japan (27%), Philippines (27%) and Chinese Taipei (27%). In nominal value, exports of goods from Asia rose to 4.69 billion dollars (32% of the world total) in 2010, representing an increase of 31% on 2009. Imports in the region rose to 4.50 billion (30% of the world total), equivalent to a 32% increase on 2009.

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Table I. Major trading partners (top-15) of 6 key Latin American countries: percentage of exports and imports by country of destination/origin, 2009 (Asian Countries marked in colour)

Source: Compiled from the COMTRADE database of the United Nations.

Table I presents a list of the top 15 export destinations for the 6 “key” Latin American countries as well as the top 15 source countries for their imports. As can be seen, in 2009 China was already the largest export destination of products from Brazil and Chile. The commercial importance of China is also significant for Peru, as in 2009 it was the buyer of more than 15% of its exports. In fact, Peru’s Exporters Association reported that in 2011 926.5 million dollars of Peruvian exports made during January and February were concentrated in China, it taking first place among the Peruvian destinations, an increase of 18% compared to the previous year (US ranked second with a total of 889.6 million


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

dollars). The association also stated that the fastest growing markets in the first two months of the year were South Korea (with its demand for natural gas) and India, displaying the role that Asia is playing in the global economy global.4 Countries like China, South Korea and Japan also have an important role as source of imports to Latin America. The highest percentage in 2009 was in Peru (15% of its imported goods were produced in China). Gráfico III . Major Asian trading partners of Latin American countries: evolution of exports by LATAM to Asian key countries

Source: Compiled from the COMTRADE database of the United Nations. Note: Latin America does not include Caribbean countries. Included countries in “Others Asia”: India, Indonesia, Malaysia, Singapore and Thailand.

As shown in Chart II, the volume of exports from Latin America directed to Asia has increased over 350% between 2000 and 2009 (the volume has increased from just under 20 billion dollars to more than 80 billion). Yet until 2000, Japan had historically been the main destination of Latin American exports in Asia, accounting for 44% of such exports. However, in the last 10 years, trade with China has taken off and it now receives more than half of Latin American exports to Asia (the percentage of total Latin American exports in Asia that are received by China increased from 22% to 55% between 2000 and 2009).5 The Andina.com web, April 3, 2011 provides more information. International trade with Japan could be further undermined given a potential shutdown of the economy after the 2011 tsunami. 4 5

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1.2 Trade Between Asia and Latin America While it is risky to predict long-term business trends, it is possible to affirm that in the medium term trade, investment and business opportunities that may arise between these two regions will undoubtedly be dominated by China, which sets the pace. That is why it is worth taking the time to look at the Chinese case in greater detail. In terms of exports, Figure IV shows us two things: (i) that China is more important to Latin America (LATAM) and (ii) LATAM is more important to China (the percentage of Chinese exports to Latin America has also increased). Historically, LATAM played a more important role in Chinese exports than China represented to LATAM exports (and percentages were low in both cases). This trend has changed in the last decade (from 2003) with the growth of trade flows. Figure IV. Bilateral Trade: China and LATAM: % that China represents in exports from LATAM and what % LATAM represents in terms of Chinese exports

Source: Prepared using information from the COMTRADE database of the United Nations. Note: LATAM includes: Mexico, Central and South America (not including the Caribbean).

If we break it down by country, such an increase in exports to Asia is primarily due to the relative importance of exports to China within the total exports that Chile, Brazil and Peru make (Chart V).


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

Figure V. Latin American exports to China: % of total exports of each country that go to China.

Source: Compiled from the COMTRADE database of the United Nations (http://comtrade.un.org)

The IDB (IDB, 2010) estimated that approximately 90% of Latin American exports to Asia are generated in the Southern Cone (41% from Brazil, Chile 23.1%, 15.9% Argentina, Peru 9.3%), which shows the high geographical concentration of this trade route. In general, China seeks access to raw materials that are generated from natural resources in the region, which are abundant but unevenly distributed throughout the country. In addition to the heterogeneity in the availability of natural resources, another factor that could explain this concentration of trade is the existence of trade barriers such as tariffs, and the existence of trade agreements between China and Latin American countries. As discussed below in the section on trade agreements, Chile and Peru are leading the way in terms of agreements with other regions, particularly Asia. Other business costs such as transportation costs, processing and information can also diminish or promote trade relations between the countries. The incorporation of China in 2001 to the World Trade Organization (WTO) could also explain part of the growth in trade relations in these regions.

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1.2 Trade Between Asia and Latin America Figure VI. Changes in the volume of exports and imports from LATAM to China and trade balance.

Compiled from the COMTRADE database of the United Nations. Note: includes LATAM: Mexico, Central and South America (not including the Caribbean.)

Despite the rapid increase of Latin American exports to China, Latin America as a whole maintains an unfavourable trade balance with respect to this country. In fact, given that the imports coming from China have increased at rates faster than exports destined for this country, Figure VII shows that the deficit in the trade balance has increased over the last decade. You could say that the need for raw materials from countries like China (which increases the exports of LATAM) coincided with the ‘discovery’ of Latin America as a potential market for their manufactured goods (increasing imports). Figure VII shows the trade balance with China for some countries in Latin America. This suggests that the negative trade balance shows the region as a whole is biased strongly by China’s trade balance with Mexico, which is one of the largest recipients of manufacturing from the Asian giant. If Mexico is excluded from Figure VII, the trade balance in the region as a whole would be definitely positive for LATAM.


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

Figure VII. Balance of trade in selected Latin American countries with China (export value - value of imports)

Source: Authors using the COMTRADE database of the United Nations.

But the commercial heterogeneity among countries in LATAM with respect to China is a truly new phenomenon. In 2000, the said balance being in the negative for all countries except Peru, but the deficit was generally small (the largest deficit was in Mexico with a negative amount of two billion dollars). By the year 2009, the trade balance had become significantly more heterogeneous. Today, countries like Chile and Brazil export more to China than they import from there. In contrast, Mexico’s trade deficit with China has multiplied by 14. Figure VIII shows the differences in the type of exports that makes Latin America key to countries in Asia and the rest of the world. While the region mainly exports agricultural and mining products to Japan and China, the products exported to the rest of the world (mainly the U.S.) are manufactured goods.

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1.2 Trade Between Asia and Latin America Figure VIII. Composition of exports from Latin America to Asia, 2009

Note: East Asia includes the following countries: Indonesia, South Korea, Malaysia, Singapore, Taiwan and Thailand. Source: IDB (2010)

Table II presents the top 10 Latin American products exported to China. It should be noted that the main 3 products represent almost 50% of total exports, which indicates the high concentration existent in this flow of commerce. Basically, China’s demand for commodities is concentrated in soybeans, copper, iron and oil and petroleum. China’s exports to the region are, however, more diversified and include intermediate and capital goods. Table II. Products exported from Latin America to China (% of exports represented by the main exports), 2009

Source: IDB Note: The classification HS2002, with up to 6 digits to classify products, comes from the English name Harmonized Commodity Description and Coding System, which is the system used by countries to collect national data and is the basis for other classification systems products such as SITC and BEC.


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

1.3 Asia - Latin America Trade Agreements Together with the boom of goods traded in the last decade, the Asia PacificLatin American ties have been strengthened due to advances in bilateral free trade agreements. Today, these two regions are experiencing a new wave of trade liberalization represented by a global proliferation of regional trade agreements (RTAs). Of a total of 86 regional trade agreements established between 2004 and 2010, and notified by the WTO, 66% have involved either an Asian or Latin American country, or both (IFPRI, 2011). Two trends have emerged from the recent worldwide increase in the number of RTAs. Firstly, there are a growing number of trade agreements between emerging countries, i.e. RTAs South-South. Asia and Latin America are at the forefront of this trend. Secondly these SouthSouth trade agreements are no longer purely intraregional, as emerging countries are increasingly carrying out trade agreements outside their respective regions. According to January 2011’s information from the database of bilateral RTAs Regional Integration Centre, Asian Development Bank, there are a total of 108 current trade agreements in Asia, whether bilateral or multilateral agreements. The key countries in Asia in these terms are Singapore (18 agreements in force), China, India and Japan (each having 11 agreements in force) and to a lesser extent, South Korea (6 agreements). Many of these agreements are with countries in the same region (i.e., other Asian countries) but the list of trade agreements continues to grow and many of them are already signed or are in the process of research and negotiation. We see here a tendency towards consolidation of their natural markets, which is to say geographical proximity or cultural affinity. The same is happening in Latin America, where the number of RTAs had reached 97 by November of 2010.6 About 43% of these agreements were established between 2003 and 2010, of which 74% are between countries within the same region. In fact, before 2003, with the exception of some (eg, the Free Trade Agreement of North America, including Mexico, the bilateral agreements with Chile and Including the countries of the Caribbean.

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1.3 Asia - Latin America Trade Agreements Mexico, the EU and EFTA countries, Chile-Canada and Costa Rica-Canada), all trade agreements between Latin American countries were. Chile has been the main driver, accounting for almost one third of all agreements signed by the region since 2003. After Chile, Peru continues with its approach to trade agreements with countries outside Latin America, including Canada, China, Singapore, the USA and more recently South Korea. Table III. Trade Agreements of key countries in Asia and Latin America. Type of agreement (in initials) and year of implementation (in parentheses)

Note: FTA: Free Trade Agreement, MFTA: Multilateral Free Trade Agreement, TPC: Preferential Trade Agreement, AAEE: Strategic Economic Partnership Agreement.Note: The treaties that say “signed”, have already been signed but not yet operational; those that say “Neg.” are undergoing negotiation.Source: Organization of American States Information System on SICE Foreign Trade, UNESCAP database on trade agreements, IFPRI (2011).

Within this wave of trade agreements, several have recently been finalized between the countries of Asia and Latin America. Table III shows the trade agreements that exist between some Asian and Latin America countries. Chile is the country with the greatest trade ties with Asia. Since the coming into force of the bilateral 2004 Free Trade Agreement (FTA) with South Korea, which was the first trans-Pacific trade agreement (in fact, Chile’s first with an Asian country and the first for Korea on a global level), Chile has deepened its ties with members of the Association of Southeast Asian Nations (ASEAN) it already has ongoing trade agreements with Brunei and Singapore (as part of a multilateral FTA, the P4 Agreement, which also includes New Zealand), a signed agreement with Malaysia though not yet in force and another under negotiations with Vietnam. Also, Chile and Thailand kicked off negotiations in Bangkok on a free trade agreement and there was a feasibility study on Indonesia that was concluded positively.7 Chile also has a Preferential Trade Agreement with India (as opposed The latter was informed by Diario Financiero, April 11, 2011

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Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

to an FTA, a TPC does involve the payment of fees, but at reduced preferential rates). Peru has recent trade agreements with China and Singapore, and has already signed new agreements with South Korea and Thailand and is also in the process of negotiating a Strategic Economic Partnership Agreement (AAEE) with Japan, similar to those it already has with Mexico and Chile. During 2010, a process of integration began as relevant as the Economic Association’s Trans-Pacific Agreement (TPP), which in a short time was able to create a free trade area including countries from both sides of the Pacific such as Australia, Chile, the US, New Zealand, Peru, Singapore and Vietnam (and possibly more countries: during the December round of negotiations, Canada, the Philippines and Japan showed an interest in joining). Also noteworthy is the beginning of the process for a “Pacific Aliance” (Alianza del Pacífico, a deep integration area) between Chile, Colombia, Mexico and Peru, which seeks economic integration in the Pacific through a zone of free movement of goods, services and capital, as well as to facilitate the mobility of people.8 Both regions are undoubtedly the best example of the importance the South-South linkages have acquired in the new world economic order. The effects of trade agreements may be seen through the example of the FTA between Chile and South Korea that, as already said, is the oldest trans-Pacific agreement. According to the report Evaluation of the seven years of the entry coming into force of the FTA between Chile and Korea, from the Chilean government,9 trade in goods between the two countries grew more than fourfold in the period 2004-2010, with an average annual growth of 19%. However, it’s noteworthy that some of the countries that are experiencing a boom in trade with China and Brazil, and to a lesser extent Argentina, do not count on free trade agreements with any Asian country. Despite the growing strength of trade linkages, there is still no free trade in various sectors, mainly due to the asymmetric trade balance that several This agreement is not signed. The information on this report was obtained from America Economia magazine of April 6, 2011.

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1.3 Asia - Latin America Trade Agreements countries have with China. Brazil, for example, reported that it would apply anti-dumping tariffs on imports of specific goods from China, particularly in the textile industry.10 1.4 Direct Foreign Investment Flows The potential benefits generated by a greater exchange of goods between the two regions are magnified by the flows of Direct Foreign Investment (DFI), which can generate additional benefits in the receiving country in terms of employment, knowledge sharing and new capital. The trade and investment data show that trade in goods is the one that has expanded most significantly (in both directions: Asia-LATAM and LATAM-Asia), but the examples of Asian businesses investing in Latin America cannot be ignored (and vice versa). If you are looking to identify areas where the greatest business opportunities are being generated, you must pay special attention to Chinese investments and acquisitions in Latin America, which have taken off since the year 2010. The latest report on DFI from ECLAC (2011) notes that by 2010 the region of Latin America and the Caribbean had shown great resilience to the global financial crisis and has become the fastest growing region, both in reception and in the issue of DFI flows worldwide. The inflow of DFI increased by 40% over the previous year and amounted to 113,000 million dollars, while outflows almost quadrupled and reached the record figure of 43,000 million dollars, which demonstrates the great dynamism of the transnational companies of the region. After the crisis, the recovery of DFI flows has been more noticeable in South America, where they grew by 56% compared with 2009 and reached 85.143 million dollars. Four countries showed a dramatic increase: Brazil (87%), Argentina (54%), Peru (31%) and Chile (17%). In Mexico (which remains the second largest recipient in the region after Brazil), and also in Central American Information obtained by Reuters on April 5, 2011.

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Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

countries DFI seeks, as well as in domestic markets, to establish export platforms to the U.S. in order to take advantage of salary and location related advantages. That is why the slow recovery of the US that led the DFI flows grew at rates below those of South America and did not reach the record levels of 2008. So part of the differences in growth of DFI to South America on the one hand, and Mexico and Central America, on the other, are due to the sector destined for the DFI being different in each region. In South America, the sectors that received the most in 2010 were natural resources and services, with a 43% and 30% share respectively, and the importance of raw materials has increased even for the period 2005-2009. Moreover, investments in Mexico continue to arrive mainly in the manufacturing sector (54%).11 The recovery of DFI in Latin America is framed in a context in which developing countries have increased their share of DFI flows, both in the quality of recipients and senders. According to a document on global and regional trends of DFI in 2010 from the United Nations Conference on Trade and Development, UNCTAD (2011), for the first time in history developing economies in transition were the recipients of a greater proportion of the DFI flows than the developed countries. Specifically, Figure IX shows that developing economies in transition received 595,300 million, representing an increase of 9.7% on 2009 and now the concentration of 53% of global DFI flows in 2010. The region of Latin America and the Caribbean received 10% of total world DFI in 2010. Meanwhile, DFI outflows from developing countries and transitional economies have been rising and accounted for 22% of global flows of direct foreign investment in 2010. In contrast, and yet as a consequence of the global crisis, DFI flows to developed economies shrank further in 2010 (-7% for 2009).

Services represent 41%, while the primary sector received only 5% of the total.

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1.4 Direct Foreign Investment Flows Figure IX. World Direct Foreign Investment Flows by group of economies, 1990-2010 ($ million)

Source: Based on data from ECLAC (2011) * The transition economies include South-Eastern Europe and the Commonwealth of Independent States.

Cross frontier mergers and acquisitions have been the most dynamic mechanism of DFI in recent years (a 37% increase on 2009). This contrasts with investments in new plants (greenfield investments), which have continued to shrink in number and value globally in 2010. While increased investment projects in new facilities in developing countries and transition economies have been set up, they have failed to offset the reduction in projects in developing countries, according to the ECLAC report (2011) which is based on data from “DFI Markets”, Financial Times. In terms of the origin of investments made in Latin America, the US remains the main investor in the region, with 17% of DFI in 2010 (ECLAC, 2011), followed by the Low Countries12 (13%) , China (9%), and Canada, Spain and the United Kingdom (4%). It stands out that in recent years, the growing involvement of 12 Given certain tax benefits, the Netherlands is used as an investment platform, in fact, this originates from other countries like Spain.


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

Latin America itself and the Caribbean as a source of DFI, which shows the increasing importance of multinational companies. While in the period 20062009 DFI from Latin America and the Caribbean accounted for 8% of the total, in 2010 the share increased to 19%. The greater relevance of Latin America itself and the Caribbean as a source of DFI in the region can also be seen in the information relating to mergers and acquisitions. Figure X. Origin of DFI received by Latin America

Source: Authors’ calculations based on data from ECLAC (2011)

China, who’s GDP reached 9.5% of world GDP in 2010 became the second largest world economy, is certainly the case in point. Quite literally “from one year to another,” this country has become the third largest investor in Latin America, behind the US and the Netherlands (ECLAC, 2011).13 In the period 2006-2009, as shown in Figure X, China only participated, on average, less than 1% of the DFI received in LATAM, while this share rose to 9% in 2010. Another case in point, but in contrast to China, is the dramatic decline in the relative importance of Spain as an investor in the region (the percentage of investments in Latin America that were generated in Spain decreased from 16% in the 2006-2009 period to 4 % in 2010). 13 Consider that the region’s countries themselves are important investors and buyers of businesses. Brazil and Mexico, for example, are among the largest buyers of Latin American companies.

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1.4 Direct Foreign Investment Flows Table IV. Some Asian investments and acquisitions of major impact on LATAM (Investments and acquisitions for over 100 million dollars)

Source: ECLAC (2011), information from Thomson Reuters, Financial Times DFI Markets, China Yearly Investment Tracker. Heritage Foundation. China Letter No. 56 June 2010.

Recent trends in Chinese DFI respond to internal and external factors, among which is the Chinese governmental policy favourable to the international expansion of their businesses. This policy has been in place since 2000 and has as its main financing instrument is loans that state banks lend to businesses for their investment projects abroad. It is noteworthy also that the largest Chinese multinationals are, with few exceptions, state-owned. Table IV presents a list of major Chinese investments in Latin America (investments of more than $100 million), and a selection of Japanese investments. In terms of acquisitions, adding up the five major ones, we have more than 21,000 million dollars, generated


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

between 2003 and 2009. In 2010 alone, its multinational corporations invested over 20,000 million dollars in the region, mostly in the extraction of natural resources. Among Asian mergers and acquisitions in natural resources, some major acquisitions in the subsector of oil and gas by Chinese companies stand out, such as purchasing 40% of the Brazilian subsidiary of the Spanish/Argentinian Repsol YPF by Sinopec for 7110 million dollars and the acquisition of 50% of Bridas Corp. in Argentina by CNOOC for about 4,800 million dollars. There are also a large number of operations in the mining sector between acquisitions valued at more than 100 million dollars, including the purchase of the Mineração Usiminas of Brazil by Sumitomo Corp., a business valued at 1,930 million dollars. These operations reflect the interest of transnational corporations to strengthen their strategy of seeking natural resources in the region, especially in South America. Although the explosive growth that Chinese investments in Latin America have undergone is undeniable, particularly in the last two years, it’s important to acknowledge the difficulty of providing precise data on the topic. In China official data is compiled by the Ministry of Commerce (MOFCOM) and, as ECLAC (2011) and the OECD (2008) point out, it is possible that this data underestimates the phenomenon as not all companies register their investment. For example, Chinese direct investment outside of the countries of the OECD is recorded as being on average forty per cent higher than reported by MOFCM. The breakdown of Chinese foreign investment by industry and country that MOFCOM as much as the receiving countries present is distorted by the custom among many businesses of channelling their investments through holdings in third countries, often registered as financial companies and of services. According to ECLAC (2011), which is in part based on information from UNCTAD, four of the ten largest external Chinese acquisitions were made from subsidiaries in

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1.4 Direct Foreign Investment Flows third countries and 79% of Chinese DFI is channelled through the British Virgin Islands, the Cayman Isles or Hong Kong (Special Administrative Region of China)14 In fact, a report from the Institute of Research and Applied Economics (IPEA)15 put forward that 96% of direct investment realized by China in Latin America and the Caribbean between 2003 and 2009 was destined for tax havens like the Cayman Isles, British Islands, Bahamas and Barbados.16 The remaining 4% went to Venezuela, Brazil, Argentina, Peru, Guyana, Cuba and Mexico. In all certainty, these percentages have varied thanks to the launching of Chinese DFI in LATAM during 2010. Other limits of the official statistics of direct foreign investment are not exclusive to China, but affect especially the investments of Chinese companies (and they could also affect the statistics on other Asian countries like Japan17 and South Korea). In the natural resources sector financing arrangements have been very important for natural resources that are not DFI but often involve a degree of control of resources by Chinese companies, at least temporarily. There is also considerable investment in infrastructure construction, in which Chinese companies produce and offer many services in the destination countries, but which are counted as exports, and not as investments. Finally, given that the largest Chinese acquisitions in the region were announced in 2010, many of them had not yet been recorded in early 2011, in the balance of payments statistics of recipient countries.

14 Moreover, part of the transactions directed to this last destination, between 10 and 20%, returned to China itself, a phenomenon known as return investment (round-tripping). 15 IPEA is a research institute that depends on the presidency of Brazil. 16 The results of this report were reported in AnsaLatina.com on April 6, 2011. 17 Note that Japanese investments in Mexico are made mostly from Japanese affiliates in the United States, which appear in the statistics as U.S. investments when in fact they are Japanese. The list of the largest Mexican companies (www.maquilaportal.com), we find several Japanese, displays this reality.


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

z Panel 1. The China-Brazil Relationship Brazil has been one of the countries with the fastest growing DFI in recent years, reaching in mid-2010 a new record of over 48,000 million dollars (ECLAC, 2011), an increase of 87% over 2009. In terms of the source of the DFI, China was the main investor by mid2010, with 15% of the total and an amount of 7,500 million dollars, and the Asian giant has since then announced investments in acquisitions of $30,000 million in the South American country. Approximately 90% of investments are concentrated in mining and energy. The outstanding purchases were made by State Grid Corporation of China (SGCC), of the Brazilian expansion companies Transmissão Itumbiara, and of a consortium of companies consisting of Cobra, Elecnor and Isolux Corsan (the latter two companies being ASAGUA members), with which the sale was closed of eight concessions on electric power transmission lines. This represents one of the largest transactions in the world in this sector. In the oil sector the purchase of the Brazilian subsidiary of Repsol/YPF by Sinopec is worth highlighting, it is the third largest Chinese investment in the world, and also the Sinochem group’s investment in Peregrino Field. The Brazilian oil company Petrobras signed agreements with Chinese state-owned Sinopec and Sinochem in the field of the exploration and exploitation of oil from practically extinguished wells. It also seeks to sign agreements between large state-owned companies in the country, as Petrobrasy Eletrobras, and with Chinese companies like the State Grid and Sinopec, in order to facilitate collaboration in prospective areas of technology and geological research. Another growing area has been the buying up of Brazilian land for agriculture, mainly to produce soybeans. Three products, petroleum, iron ore and soybeans, virtually make up the total of Brazilian exports to China. For example, the Chinese state owned Sanhe Hopefull plans to invest 7,500 million dollars in the coming years in agriculture and infrastructure in the state of Goiás to ensure the direct purchase of six million tons of soybeans a year. This announcement adds to that made recently by the Chinese group Chong Qing Grain Group, which plans to invest 2,400 million dollars in an agricultural complex in north-eastern Brazil. Despite the concentration of trade and investment in a few sectors, and although Brazil and China do not have any trade agreements, the two countries signed in April 2011, several agreements on oil technologies, energy, aeronautics, science and technology, nanotechnology, telecommunications, water resources, sanitary standards, defence, agricultural technology and tropical agriculture. Brazil seeks to promote the development of agricultural biotechnology, and it is one of the leading countries in the field.

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1.4 Direct Foreign Investment Flows Despite the statistical limitations, the sectors in the region in which China invests are well defined. Chinese investments are focused in the oil and mining areas (Latin American Centre of Asia-Pacific, 2011). Brazil, as a member of BRIC, continues to receive much of these flows (Panel 1 presents some details on the trade and investment relationship between China and Brazil). However, Asian investments, especially coming from China and Japan, do not necessarily focus on the larger countries like Brazil. There have been several recent announcements of investments in smaller countries. For example, China’s ZTE company and Telefonica Moviles Panama signed a technical assistance agreement in order to provide a technology transfer network with 2G and 3G (and 4G in the near future) in Panama.18 Also, Asian companies such as Sumitomo, Mitsubishi and Kores, and recently the government of Japan, have shown their interest in Bolivian Lithium, the country with the largest reserves of the mineral, necessary for the manufacture of batteries.19 And not all the investment comes from China. The Indian company Osho Group announced it will invest $500 million in Paraguay in a soybean oil refining plant, a cement and steel plant, and a working fleet. It was reported that the goal is to reach the South American market from Paraguay.20 In conclusion, this is practically a new avenue for trade and investment that requires, now more than ever, monitoring and analysis aimed at identifying the business opportunities that lay ahead. It is particularly necessary to monitor the investments in the opposite direction (LATAM to Asia), as their business cases have not been well studied. There are reports of recent investments, for example, that of the Brazilian meat processing group Marfrig announcing that it is to invest $300 million in order to form two joint ventures in China to explore logistics and food and beverage distribution businesses.21 In another example, the Mexican company Cinepolis is to open cinemas in the huge market of India, which reminds us that although China remains the major player in the medium term, we must not lose sight of other markets.22 Note publisehd on Xinhuanet.com. April 8, 2011 The magazine America Economía, in the edition that covers the day April 7, 2011, provides more information. 20 News published in the newspaper ABC, April 4, 2011. 21 Information published by Reuters on April 11, 2011. 22 The Economist magazine argues in its edition of May 14, 2011 on the diversification of markets in Asia. 18 19


Chapter 1 From G8 To G20: The New Global Order and the Links Between Asia And Latin America

The current situation is, in short, that Asian countries, and particularly China, seek sufficient supplies of natural resources. But what is still open to debate is whether the meteoric increase of Chinese investment in some countries generates a net profit in the region or not. That’s why we close this chapter with some reflections on the pros and cons in economic terms of this new phenomenon and what the implications in terms of business opportunities are. The two concerns of the region are deindustrialization, which is currently a big concern for Brazil, and the increase of its dependence on exports of raw materials in the last years.

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Chapter 2. Business Cases The growing trade and investment between Asia, particularly China, and Latin America now constitutes a reality that’s magnitude continues growing at an almost exponential rate. China is now a powerful source of funding: its companies invest, buy shares in companies in numerous countries, both in rich and developing ones. Latin America has not been the exception. Although globalization has facilitated business between the countries, regardless of the distances and time zones, it has not succeeded in eliminating all the obstacles and barriers that may hinder trade and investment flows on a worldwide scale. Factors relating to customs (including business practices) and languages can still undermine the potential for trade. This is where Spain is seeking out its role as “bridge” between two regions that had been connected in the past but that are just beginning to rediscover each other. Spain and its companies can take on this role as Latin America can be considered as its “natural” market and vice versa (Casanova 2009b) and Asian companies interested in expanding in this region, and that do not have the necessary knowledge of their business environment, can find important allies in Iberian businesses and institutions. Spain not only shares the language and historical ties, but also trade links with Latin America have also managed to provide many Spanish companies with knowledge in aspects as diverse as financing alternatives, government relations, the macroeconomic context, risk management in the exchange rate, etc. The aim of this study -which starting point is the previous study by Soler Matutes (2007) and the studies on Latin American companies by Casanova (2009a and 2009b)- is precisely to reflect on the extent to which Spain has exercised the role of “bridge” in practice, and in this chapter we present, therefore, the experience of some Spanish companies that have operations on the two continents.Some are multinationals, with a long history of internationalization, and some are small and medium sized businesses looking to expand to new markets, particularly after the global financial crisis of 2008, which greatly changed the global economic


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scenario and the role of the emerging countries. Given that not only national companies have identified the potential of Spain to facilitate business between the two continents, we also present the cases of companies both in Asia and Latin America that have spread throughout Spain. The business cases can be classified into three areas: (i) the majority are Spanish companies, both large (multinationals) and small and medium sized businesses: Alfa Hogar, BBVA, Farmaegara, Ficosa International, Garrigues, Miguel Torres SA, Port of Barcelona, Repsol YPF and Telefónica, (ii) as an Asian company we present the case of Singapore Airlines, (iii) on the Latin American side we put forward the case of Mexico’s Cemex. The cases are presented in alphabetical order and the length of each case is based solely on the fact that some companies have more information available and a longer history. The cases are not intended to predict the success of companies, but to offer an experience that may be a benchmark for other companies.

Alfa Hogar The company Alfa Hogar (Alpha Home) belongs to the Alfa group,23 which was founded in the Basque Country in 1920. It is dedicated to the designing, developing, manufacturing and marketing of small household appliances. In September 201124 the company had 60 employees (all in Spain, except for two who are in China for the purchasing process, validation and certification) and obtains 12.5 million euros in turnover. The Alfa Group, in its entirety, consists of over 700 employees and a turnover of 102 million euros. Alfa Group’s property is divided up as follows: 51% belongs to the management team through a process of MBO (Management Buy Out), and 25% is privately owned by one-person, 14% belongs to COFUNSA (a group of workers) and 10% corresponds to SOCADE (Society of Euskadi Capital Development). 23 The Alpha Group is an industrial group diversified in various activities and consisting of five business units: stamping, machining, casting, consumer products (Alpha Home) and art. 24 Source: Authors’ interview with the company.


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Business Cases - Alfa hogar Alpha Home has a presence in Spain, Portugal, France, the UK, Italy, Switzerland and Austria. In addition, agreements have been signed with South Korea, Germany, Holland, Belgium, Denmark, Norway, Finland, Sweden and Russia, countries which will start operations in January 2012. The company expects to reach a turnover of in excess of 18 million euros and that exports will represent a 60% of total sales with entry into these countries. The company is the market leader in categories such as domestic vacuum conservation, household appliances for families with young children, and leisure sewing. Among its competitors are Brother, Elna, Necchi, Bernina, Toyota in sewing; FoodSaver, Laica, MagicVac in vacuum conservation, and Beaba, Petit Terraillon, Philips/Aventt, in baby products. Expansion and internationalisation Alfa was established in 1920 as the Cooperative Corporation of Alfa Firearms Production, and from 1929 began manufacturing sewing machines, including all the components (with the exception of the needle). The company was renamed in 1932 as the Alfa Cooperative Corporation and two decades later, in 1959, registered a record 2,013 workers. After facing a sales crisis in the period 19751980, and again in 1989, by lifting tariff barriers (representing the entry of Asian products), the company was constituted in 1993 as Alfalan, SA, denominated Alfa Group. In May 2007 new strategic lines were established and the company restructured motivated by a dependence on Asian commercial products and to overcome some shortcomings. In the absence of a catalog of products, the company developed a different focus on niche markets. Given the narrow focus on traditional channels of selling sewing machines, they adopted new sales channels and marketing techniques. The most important step was taken in terms of the internationalization of the company, which did not exist until then. Internationalization is planned in three phases: restructuring, consolidation and growth (see Figure XI).


Chapter 2 Business Cases

Figure XI. The expansion of Alpha

While the consolidation of internationalization was planned to begin from January 2010, it had started already by the beginning of 2011, when a catalog of varied products became available, self-developed and exclusively designed. Alpha Home has two strategies of internationalization: the internationalization of production and the internationalization of marketing. We explain below the role of business as a bridge between Asia and Latin America. The Role of bridge a. Internationalization of Production Alpha Home made its entire catalog outside of European borders, through industry partners in Tokyo, Hong Kong and Xiamen (China). On the other hand, it designs and develops its products in partnership with engineering and design firms located in Barcelona and Cordoba (Argentina). It therefore constitutes an interesting example of the role of bridge Spanish companies can play in production: to optimize costs, Alpha Home products include an Asian

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Business Cases · Alfa hogar component (the means of manufacture of in the country) and one in Latin America (with an Argentinian company in charge of design and engineering). Alfa patents and protects products and brands internationally and manages all quality processes and sampling. b. Internationalization of Marketing The company’s industrial agreements have established Europe and Latin America as their target markets. Although it has not yet begun to sell in this last region, Alpha Home will begin marketing products made in Asia, first in Chile and Mexico, then moving on to Colombia, Peru, Brazil, Panama and Argentina in an initial phase. In these markets, the business model will be to expand rapidly without using vast resources for which local distributors will be sought exclusively in each country (for the brand Alfa), establishing with them the marketing and sales plan. However, on occassion distribution through licensing has been contemplated, which is to say, to give the commercial benefits of branded products to the distributor in selected markets (countries, regions, channels, etc.) for a payment of a previously established royaly, fixed and variable. In addition, the role of commercial bridge can be presented an inverse sense: the commercial activity of Alpha Home being concentrated in Europe and soon in Latin America, the company gives up the commercial utilization of its products in the rest of the world to its industrial partners Asia, and as so continues paying off all the investments made. This implies that, through the accession affected by a Spanish firm, that Asian firms sell in Asia products that incorporate engineering developed in Argentina and design from Barcelona.


Chapter 2 Business Cases

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BBVA La empresa Banco Bilbao Vizcaya Argentaria (BBVA) offers the financial services of a comercial and investment bank, and employs about 110,000 people in its global operations in over 30 countries, the main markets being Spain, Mexico and the US.25 The group reorganized its business structure in January 2008 and operates on two main lines: retail banking and wholesale banking. Retail banking operations are in the euro area (Spain and Portugal), Mexico, the USA, and the rest of the Americas. There are also divisions of wholesale banking, asset management and the corporate division. The group recorded revenues of approximately EUR 20.9 billion during the period of the fiscal year ending December 2010, representing an increase of 1.2% over 2009. Net income, in turn, increased by 8.7% from 2009.26 Figure XII. Income for BBVA by region of operations, 2010

Source: Based on information from Datamonitor 360

25 Datamonitor 360 reports a total of 106,976 employees, according to its published online business Report (www.360.datamonitor.com), April 7, 2011, while Capital IQ reports 108,594 employees in its updated report of 31 May 2011. 26 Information obtained from the Annual Report for the fiscal year 2010, sent by the company to the U.S. Securities and Exchange Commission.


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Business Cases As shown in Figure XII, 44% of company revenues are generated by their subsidiaries in Latin America, where it provides commercial banking services, investment banking, insurance and pension funds. The bank operates in the following countries: Argentina, Chile, Colombia, Mexico, Panama, Paraguay, Peru, Puerto Rico, Uruguay and Venezuela. In Bolivia and Ecuador it operates exclusively in the business of private pension funds.27 Mexico is its biggest market outside Spain, where it holds a market share of between 25-35% of the banking sector (as well as in the insurance and pension fund sectors).28 The division of wholesale banking and asset management focuses on providing services to large international companies and in investment banking and capital markets. This segment consists of several business units, and one focuses on Asia and BBVA’s stake in the CITIC Group (the others are corporate and investment banking, global markets and asset management). Expansion in Latin America The expansion of BBVA in Latin America came as the bank was transformed into what it is today through mergers in the domestic market. In 1988, the Banco de Bilbao and the Banco de Vizcaya (which had existed separately since 1902) merged to form the Banco Bilbao Vizcaya (BBV). BBV entered Peru in 1995 following the privatization of the Banco Continental, and Mexico through the Probursa Bank, it expanded its presence in Colombia through the Banco Ganadero and in Argentina through the French Bank. BBVA was formed in 2000 through the merger of BBV and Argentaria. The integration of the group’s retail businesses in Spain led to the creation of a significant network of branches under the banner of BBVA. In Mexico, BBVA Probursa merged with Bancomer in 2000 to create BBVA Bancomer, the largest bank in the country today.29 Then, the brand expanded the group’s subsidiaries in Latin America: in Brazil, the company bought a stake in the Bradesco Bank Other countries in which BBVA operates in pension funds are Chile, Colombia, Mexico and Peru. It should be noted that the company was to cease operations in Bolivia as the government of that country presented, in late 2010, a project to nationalize pension funds and create a single state enterprise. 28 According to information from Datamonitor 360 (BBVA Report April 2011). 29 According to the National Banking and Securities Commission in Mexico, in its monthly bulletin of March 2011, BBVA Bancomer is now the bank with greater market penetration in terms of total assets and in terms of portfolio. 27


Chapter 2 Business Cases

in 2003 (however, the group sold its 5% later in 2008); in Chile and Colombia their acquired banks changed their name to BBVA in 2004; the company finally acquired 100% of BBVA Bancomer’s capital in 2005 and purchased Forum in Chile in 2006. One of the most recent company expansions took place in Uruguay in May 2010, where it signed an agreement with France’s Crédit Agricole to acquire the Credit Bank Uruguay. With this transaction BBVA became the second largest financial institution in the country with a 24% market share.30 In contrast, in Argentina, BBVA (French Bank) recently announced in April 2011 the sale of some of their interests such as the pension administration company Consolidate Retirement Insurance Company SA. In summary, the operations of BBVA have been dynamic in Latin America, expanding in several countries (one important exception is Brazil), and the company is today, along with Banco Santander, a business leader in the region. Expansion in Asia and China BBV established its first branch in China (Hong Kong) in 1985, but it was not until 2005 that BBVA, as such, that it strengthened its presence in this country upon opening a new office of representation in Shanghai and expanding to the rest of Asia with a corporate unit and offices in Tokio.31 Currently BBVA has branches in four cities in Asia (Hong Kong, Seoul, Singapore and Tokyo) and offices of representation in five other cities (Beijing, Shanghai, Taipei, Mumbai and Sydney). The first acquisition in Asia came in March 2007 when BBVA became a strategic partner of the CITIC group,32 after acquiring 5% of China National CITIC Bank (CNCB)33 and 15% of CITIC International Financial Holdings (CIFH), According to information from Datamonitor 360 (BBVA Report April 2011). Banco de Vizcaya has had, since 1977, a representative office in Tokyo. This group took its name from its predecessor, China International Trust and Investment Corporation. It is now a state-owned conglomerate based in Beijing that offers banking, investment, insurance and communications services through its subsidiaries. The group currently has 44 subsidiaries, among which is China CITIC Bank (CNCB), which does have private capital. 33 CNCB has its headquarters in Beijing, according to BBVA Hong Kong, it’ss the third largest Chinese commercial bank operating as a corporation: http://www.bbva.hk/TLEU/tleu/jsp/hk/ing/aboutus/bbvaasi/ index.jsp 30 31 32

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Business Cases - BBVA a subsidiary of the group in Hong Kong. In 2008, the Spanish company strengthened this alliance, increasing its stake to 29.7% in CIFH and 10.07% in CNCB.34 Since April 2010, the Bank of Spain has owned 15% of CNCB.35 both entitites have closed collaboration deals and created two joint ventures that allow them to offer car finance and private banking. BBVA has a status of “unique strategic investor” within CNCB.36 The results are good so far. The wholesale business in Asia experienced very good development in 2010 and remains the basis for the organic growth of BBVA in the region. The loan portfolio in that region increased 13.8% compared to December 31, 2009. Attributable, accumulative net profit rose by 95.6%.37 When the BBVA - CNCB pair was strengthened in 2008, Jose Ignacio Goirigolzarri, CEO of the bank at that time,38 stated in El Pais that the new corporation made them into ideal strategic partners to target investment of Chinese companies in Latin America and indicated that “the Spanish bank brings its expertise in the area and the Chinese bank its knowledge of the domestic customer.”39 The representative of CNCB, Ouyang Qian, meanwhile, said that Chinese businesses received instructions from the Government to go out into the world and that “Latin America is stable, has a great quantity of natural resources and a very good investment environment.”

Information DataMonitor 360 (BBVA Report on April 2011). An acquisition that has involved additional expenditure of 1,000 million dollars. The accumulated historical investments of the company in China exceeded 4,000 million dollars. 36 Citic Securities Co., CITIC Group, has signed an agreement with Crédit Agricole, according to which the Chinese company will buy 20% of the subsidiaries in Asia and Europe from the French company for $ 374 million. It is too early to know how this purchase will affect the status of BBVA as a ‘unique strategic investor.’ Source: http:// www.businessweek.com/news/2011-06-09/citic-to-pay-374-million-for-credit-agricole-unit-stakes.html 37 According to the report of the fiscal year ended December 31, 2010 and that the bank sent the U.S. Securities and Exchange Commission in 2010. 38 Angel Cano is the current CEO of BBVA. 39 In an article published on June 20, 2008. 34 35


Chapter 2 Business Cases

The role of bridge Trade relations and investment flows between Asia and Latin America continue to strengthen. According to Victoria Rodriguez Bueno, Director of BBVA, in 2010, the volume of transactions between BBVA Asia and Latin America was 1,100 million dollars, showing an increase over the same transactions in 2005, estimated at 800 million by BBVA (study by Soler, 2007). It’s also noteworthy that the bank has continued to increase financial services, making the most of the synergies offered by the franchise on both continents. For example, during 2009 and 2010 BBVA Asia participated in six financing transactions in Latin America through Credit Export Agencies (CEA, as is its acronym in English), with a value that reached 260 million dollars. Rodriguez makes sure that BBVA’s experience in Latin America provides a solid advantage over agencies from other countries, and this is reflected in the diverse trade and investment services offered through the bank’s Latin American subsidiaries to groups from different Asian countries: China, Hong Kong, Japan, South Korea and Australia. BBVA has already acted as a “bridge” between Asia and Latin America on various projects with Japan. As mentioned in the study by Soler (2007), the Spainish bank’s branch in Tokyo participated on the Japanese agency’s export promotion and external cooperation projects with Latin America. During 2004, for example, BBVA participated in twelve financing transactions with a value that reached 205 million dollars. The Spanish Bank has also acted as a provider of funds and on risk management for the Japan Bank for International Cooperation (JBIC) on its investment projects in Latin America. BBVA has acted as a bridge through the knowledge it possesses on the region in terms of loans, investment projects, risks, etc..

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Business Cases - BBVA However, as of this date, the global economy has changed dramatically, particularly after the great financial crisis of 2008 and the rapidly growing role of emerging countries. Almost “overnight” China has become a key partner for Latin America, particularly from 2010 where, as we saw in chapter 1, there was an explosion of foreign direct investment from Chinese businesses in Latin America. In the past five years, the role Japan previously had as an investor in the region, and the “triangulation” that this country had with the Spainish bank, has now been ceded to China. With its economic growth, China’s regulatory authorities have been gradually implementing reforms to put their own financial markets in line with global trends. This has allowed for greater cooperation from Spanish banks, and other countries, with Chinese entities. Moreover, some of the most recent agreements that have been finalized with the Asian giant’s institutions are aimed at expanding into other emerging markets, where Latin America stands out. That is why the role of BBVA as a bridge between China and Latin America has strengthened. This said role is reflected through several mechanisms: from (i) financial services in yuan (RMB) to corporate clients in Latin America (and that seek to do business in China), (ii) agreements to advise Chinese entities based on the experience of BBVA on the continent, to (iii) agreements with Chinese banks to finance projects in Latin America. We continue by explaining these three examples. First, in March 2011 BBVA announced the signing of an agreement with China Citic Bank, through which BBVA provides its customers with yuan services for operations in foreign trade, becoming the first Bank of Spain to offer services in China’s currency (RMB/yuan renminbi) to their customers. Since these services are extended to all countries in which the Bank of Spain has a presence, the new agreement is particularly important for Latin America, as it is the main market for the Bank of Spain. The solution would be subject to current local legislation in each country. BBVA seeks to make the most of opportunities 40

Internationally, this bank is known by its English name: People’s Bank of China.


Chapter 2 Business Cases

involving new measures promoted by the Central Bank of China40 to facilitate business transactions of their country on a global scale: since June 2010, Chinese authorities have allowed companies from 20 of their provinces do business in renminbi with clients from anywhere in the world, a policy that has also benefited from the liberalization of the currency.41 For its part, the Spanish bank has also introduced other innovations to strengthen this bridge in particular countries. BBVA Banco Continental, for example, launched the service “China Comex” in Peru for Peruvian exporters and importers to do business with China in real time and at local cost.42 Among the services offered in the Comex account is it’s in RMB, which means it’s the only account in the Peruvian market for doing business with China, it’s making international payments and receipts in China’s currency, exchange charges though forwards43 of exchange rates and personal attention in BBVA China. Secondly, also in 2010 a co-operation agreement with CNCB was concluded to develop pension plans in China. The Asian giant would be inspired by the systems of individual investment accounts such as exist in Chile, a pioneer country in the implementation of such schemes on a national scale, and other Latin American countries that followed the example of the Andean country.44 This is an area where BBVA has extensive experience in Latin America, where it has offered its fund administration services for retirement for more than 10 years. The cooperation agreement, valid for a minimum period of 12 months (and being able to expand depending on the outcomes), including collaborative consultation on the structure of pension plans, product design and customer service. China may, on the one hand, benefit from the know how of the Spanish bank, while BBVA on the other hand, would have access to a potentially huge market such as pensions (especially in China, whose population is aging and reaching retirement age at an accelerating pace). Information obtained from an online publication, EuropaPress.es, November 3, 2010: http://www.europapress. es/economia/finanzas-00340/noticia-economia-finanzas-bbva-dara-servicios-yuanes-operaciones-comercio-exterior-acuerdo-china-citic-20101103173303.html 42 Article from Five Days “The Chinese Giant Comes to Latin America”, February 4, 2011: http://www.cincodias. com/articulo/empresas/gigante-chino-icbc-llega-latinoamerica/20110204cdscdsemp_9/ 43 A forward is an agreement to sell or buy yuan (CNY), at a future date, at a price (exchange rate) determined at the start of the transaction. This operation can be performed against both the Peruvian currency, soles (CNY/PEN), or against U.S. dollar (USD/CNY). 44 These systems are regularly obligatory savings and resources mechanisms and are managed and invested in by private investment companies. 41

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Business Cases - BBVA Finally, in January 2011, the China Development Bank (CDB), the country’s largest bank by assets,45 21 signed an agreement with BBVA to promote cooperation between the two banks in business outside of China, mainly in Latin America, areas such as trade and project finance, business services, financial derivatives, corporate banking and bonds. In fact, BBVA has become the first Spanish company to sign an agreement with the CBD. This agreement does not imply participation in financial institutions and is independent of the cooperation with China Citic Bank BBVA (although it can be seen as complementary within the Spanish bank’s expansion plans in Asia). Rodriguez Bueno, Director of the Bank of Spain, further notes that in recent years there have been transactions realized with coverage of ACE SINOSURE China and large Chinese customers, and one of them won the prize “Deal of the Year 2010” in project financing. BBVA has also acted as an agent bank for trade finance with incomings of more than 1,000 million euros. BBVA has not been alone in this process and, in general, the big banks of Spain use their strength in Latin America to open gaps in Asia and particularly China. One of the last movements has been protagonised by Banco Santander46, which announced on March 28, 2011 that it had sealed a strategic alliance with China Construction Bank (CCB), the second largest company in that country by assets. Both entities have a financial arrangement whereby CCB customers who have import and export business in Latin America and Western Europe can receive financial support from Santander.46 In addition, the Spanish bank is also interested in expanding into the Chinese market and both entities have agreed to create a joint venture to develop the banking business in the country’s rural asiatic areas.47 “La Caixa” is another Spanish institution that has a decided presence in Asia. Criteria, the holding of the Catalan organisation’s industrial shares, has in its power 15.20% of the shares in the Hong Kongese Bank of East Asia. While Banco Santander has pursued a strategy of cooperation through partnerships 45 This bank is a public institution under the direct jurisdiction of the Chinese government and one of the largest Chinese banks by volume of assets. It has a substantial international presence and is the largest provider of international funding from Chinese banks. It has made large-scale projects in countries such as Argentina, Brazil and Venezuela. 46 An article in this respect was published by ABC on November 3, 2010. Executives from the Spanish bank indicated the importance of the business opportunities generated by trade and investment links in China and Latin America, both regions undergoing growing rapidly. 47 The agreement provides for an initial joint investment of the two groups of 380 million euros, according to the Wharton Universia report. The Spanish bank would control 19.9% of the company.


Chapter 2 Business Cases

and La Caixa a holdings type participation, BBVA has pursued a strategy that combines both structures (the holding and the cooperative). It is likely that the agreements with Chinese entities will ensure long-term growth for BBVA, to strengthen its role as “bridge” in the growing trade and investment relations between Latin America and China. Spain offers better access to their natural markets (given its knowledge of Latin America), while Chinese companies give access to its large market. These types of agreements for which firms of a complementary geographical position ally to compete in a block are a way to gain a global presence without taking big risks. However, it should be noted that Chinese entities are not necessarily going to appeal to Spanish institutions to enter Latin America. For example, the Industrial and Commercial Bank of China (ICBC), the world’s largest bank in terms of market value and deposits, will become the first Chinese bank to operate in Latin America by opening an office in 2011 in Peru. The aim of the branch is Chinese customers who want to invest in the region and companies, Chinese or not, intending to do so in both countries (that is, it emphasizes bilateral trade and the respective services to investors and entrepreneurs).48 Then, given that China will not always need Spain, Spanish companies must also continue to innovate and explore new markets. Currently, the bank is also seeking acquisition opportunities arising from the restructuring of the Spanish financial system, primarily opportunities among savings banks, and expansions in the U.S. and in emerging markets. The company is also looking to Asia to explore investments in TEFs (Traded Exchange Funds),49 among other investments, and has just appointed a new CEO in Asia, Gonzalo Toraño, who could bring new growth to that continent. Indeed, another area of opportunity for the company is to expand beyond China. There has been some progress. In India, one of the strategic markets on the Asiatic continent and in the field of retail banking, BBVA and Indian Bank ICBC, in 2011, just opened its first office in Spain. These are funds traded in the market, including stocks, bonds and other instruments, which allow you to take positions on such indexes as the S&P 500. It is an ideal product in terms of asset allocation (because of its high degree of diversification), simple when it comes to operation when (just as agile as shares) and costs (cheaper than investment funds). 48 49

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Business Cases - BBVA of Baroda reached an agreement in December 2010 to create a joint venture to offer credit cards. Once the competent authorities approved the alliance, BBVA acquired a 51% stake in the credit card unit of the said bank.50 However, given the great visibility the Bank of Spain has in Latin America, there are still many markets with which “bridges” may be formed and this is reflected in recent developments. In October 2011, BBVA and the largest banking group in South Korea, Woori Finance Holdings, signed a non-exclusive partnership agreement aiming at expanding its lines of business (in fixed income products) and portfolio (for other types of products they also have agreements with the China Development Bank, for example). Woori hopes the deal to will facilitate its increase in presence in international markets, especially in Latin America.51

50 The bank will invest $34 million in this transaction with Bank of Baroda, which has 3.100 branches and 36 million customers in India. 51 Source:http://www.cincodias.com/articulo/mercados/mayor-banco-surcoreano-firma-preacuerdo-espanolbbva/20111012cdscdsmer_1/


Chapter 2 Business Cases

Cemex The company, its operations and international expansion The Mexican giant in the production of construction materials CEMEX S.A.B. of C.V., founded in 1906, has operations in over 30 countries and is the third largest business in the world the industry.52 The company, through its subsidiaries, is engaged in the production, marketing, distribution and sale of cement , ready mix, aggregates and other construction materials throughout the world.53 The company sells its products primarily to distributors in the construction industry. The company recorded revenues of 14.1 billion dollars in 2010 and employs approximately 46,500 persons.54 The key to the success of CEMEX has been the acquisition of assets and vertical integration - particularly through acquisitions of its own suppliers or competitors . The company is looking for both a larger market and also greater efficiency. Its first international expansion strategy focused on the south-western US along the border with Mexico. Then, after two major acquisitions in Spain in 1992 (which we’ll go on to explain in the next section), CEMEX began to expand to other continents and has focused its global strategy both on developed economies, with a large presence in the U.S. and Europe, as well as in the emerging countries, particularly in Asia.55 After several acquisitions that were made in the US in the decades of 80s and 90s,56 from the year 2000 on the company began to expand into developed countries’ markets with the acquisition in the same year of Southdown in the US and later with the acquisition of RMC in Britain in 2004. With that purchase the company became a significant presence throughout Europe through the subsidiaries of RMC in Germany, France and Hungary and it took on two main languages, Spanish and English, to 14. The purchase of Rinker in Australia in After Lafarge, in France, and Holcim, based in Switzerland. It also provides asphalt, prefabricated rooves and walls and concrete and prefabricated materials, such as concrete blocks, concrete paving blocks, tiles, and floor systems and sleepers for railway infrastructure. 54 Data obtained from a report published by the company DataMonitor360, June 29, 2011. 55 It is also has important operations in Egypt. 56 Some of the acquisitions in the United States were from the Gulf Coast Portland Cement, Houston Shell and Concrete, Houston Concrete Products, Pharris Sand & Gravel, Balcones Cement Plant. In addition, there were already joint venture operations with Southdown since 1986. 52 53

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Business Cases - Cemex 2007 was another of CEMEX’s major international operations. This purchase was very controversial because, for the first time, Cemex had to raise its initial offer. It also increased its presence in the U.S. through a subsidiary of Rinker just before the ‘subprime’ crisis, subprime, so-called “trash mortgages”, and the subsequent crisis in real estate. This crisis, that also affected the Spanish real estate sector, caught Cemex out with a great amount debt, the inheritance from the Rinker purchase. This forced the company to renegotiate the debt and sell part of their assets from Rinker (among other assets) to the Swiss Holcim Group. The expansion in Southeast Asia began in 1998 with the acquisition of APO Cement in the Philippines and the purchase of share capital in Rizal Cement, also in the Philippines, and Semen Gresik in Indonesia. From the year 2000 on it also acquired the Thai Saraburi Cement, made greenfield investments in Bangladesh and came to agreements with Taiwan Cement Universe. The Mexican company also has subsidiaries dedicated to investment. Asia Holdings Ltd with its headquarters based in Singapore, for example, operates precisely as an investment holding company and has been the office responsible for some of the acquisitions in Asia.57 In recent years, particularly after the global crisis (which particularly affected the finances of the Mexican company), emerging countries have gained political and economic influence, particularly China. CEMEX was already operating in this country (in the cities of Tianjin and Qingdao) four ready-mix concrete plants and their entry there has been successful, so much so that the Mexican company won awards in January 2011 at the Sustainable Development Awards.58 Given that the focus of the Mexican company has had regard to the emerging countries, together with the growth of China as the second largest economy in the world, it is likely that the business of CEMEX will expand in this direction in the near future. Lorenzo Zambrano, chairman of the company said in February 2011 at a press conference that China consumes 50% of the cement produced in the world,59 and then the cement company approved in the same month the issue of 57 These types of companies deriving income from dividends, rents or interest that do not produce goods or services. Joaquin Estrada was named president of CEMEX Asia in April 2011, as circulated in various media (including Ameritrade.com, in a article, April 11, 2011). 58 The name of the survey is in English: “China Top 10 Influential Ready-mix Concrete Enterprises in 2010.” 59 Statements published in a briefing article, Fow News Latino, February 25, 2011.


Chapter 2 Business Cases

up to 6,000 million shares, that will be used mostly to support use convertible debt in order to avoid an immediate dilution and higher financial costs, and will later male attempts to associate itself with Chinese manufacturers.60 Cemex Spain and the role of bridge Given the volatility of the Mexican economy, international expansion has been achieved through the Spanish subsidiary. An employer we can identify from CEMEX’s experience in Asia is that Spain is serving as a “bridge” in the business of the Mexican company with that continent. Originally, after the purchase of RMC, Cemex’s European headquarters were in London but in 2006 they moved to Madrid, from where they now oversee Asian operations. Cemex entered the Spain market in 1992 through acquisitions of the Valencian Cement and its construction auxillary (Sanson), at the time the two largest cement companies in the country. CEMEX Spain, part of the international group of cement (Cemex Group), of which Cemex, S.A. of C.V. is the “mother” company, was born of the Valencia Company of Portland Cement, based in Madrid, and has several subsidiaries, among with which are some Spanish companies such as Andorra Cement and Castilla La Mancha Cement, S.A.61 The thing to note is that CEMEX Spain also has subsidiaries in other regions such as Cemex Venezuela SACA, in South America, and Cemex Asia B.V., which is based in Amsterdam. This type of organization is interesting because the Spanish headquarters is also engaged in the acquisition, holding and sale of investments and part of their international operations go through the office in Madrid. In April 2011 it was announced that the president of Cemex, Lorenzo Zambrano, had expanded the number of partners in top management, from four to nine. Among them the figure of the CEO of Cemex Spain, Joaquin Estrada has been Published by Spanish CNN, article, February 24, 2011. The Group is engaged in the manufacture of cement, concrete and mortar, as well as aggregate extraction and sale of products extracted and manufactured

60 61

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Business Cases - Cemex backed up. After his stay in Madrid, this 47 year old from Rioja this has been named president of Cemex Asia, responsible for its international marketing. The business units in Asia are located in Bangladesh, the Philippines, Malaysia, Singapore, Thailand and Taiwan. The Asian region is the most promising for the expansion of large cement companies like Cemex, Holcim or Lafarge.62 Then in June 2011, it was announced that Jaime Ruiz de Haro had been appointed as the new Director and Chief Executive Officer (CEO) of its subsidiary in Spain, leaving him in maximum charge of the cement company in Asia,63 where from 2007 he’s promoted a number of corporate social responsibility projects.

62 63

This information appeared in a article CincoDias.com on April 13, 2011. This information appeared in a article by Terra (economia.terra.com.mx) on June 2, 2011


Chapter 2 Business Cases

Farmaegara The company Farmaegara is a family business of Catalan origin created in 1997 and intended for the procurement and supply management of pharmaceutical products to the pharmacies sector, hospitals, geriatric and mental health institutions, both public and private. The company is a majority shareholder and its activities centre on acquisition, storage and logistics of various products from manufacturering laboratories or from medical supplies distributors to customers, in order to personalize and interpret their needs with the end of reducing their costs. The company has three warehouses that allow distribution to all parts of the Iberian Peninsula. The first originated in Terrassa (Barcelona) and then the company expanded to Madrid. Later, in May 2007 Farmaegara adcquired Farmaeuropa, a store founded in 1991 and located in the town of Chauchina, Granada, and with this a logistics system with greater distribution power in central and southern Spain was achieved (Both companies have the cooperation of more than 14,000 pharmacies located throughout the country). The company is established in different sectors of the market for distribution of pharmaceuticals and medical products. The main line is dedicated to providing comprehensive care in hospitals and assistance centres for private mutuals and ensured through the supervisory pharmacies of their deliveries of medicine. There is also a range of products aimed at companies with their own medical service or for service of occupational risk prevention, as well as a commercial network of the supply of exclusive specialties, having contracts with the major pharmaceutical companies. The retail network in pharmacies extends throughout the Spanish market and currently has 36 businesses and seven promoters.

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Business Cases - Farmaegara The total turnover of the company at the end of 2010 was approximately 103 million euros (63% correspond to Farmaegara and Farmaeuropa). The annual average of workers has grown year after year, with an average of 63 people over 2010. The company is focusing its efforts on new projects that mean they’ll emerge stronger from the current economic cycle: the hospital line of business and the opening of new international markets (the opening we go on to explain in the next paragraph). The competitors are other distributors of medical equipment and pharmaceutical products. In order to compete, the company points out that it has a competitive advantage: the realization cost studies. These are: i) the analysis of real consumption of the client companies, advising on the most profitable brand in terms from a list of possible substitutions, ii) logistics operator services, where orders are delivered by transport appropraite to the needs of the product (optimal conditions of temperature and handling).64 Farmaegara has become a benchmark in comprehensive pharmaceutical distribution, being an advi8sor at the National Association of Pharmaceutical Advertising Specialties (NAPAS) and a member of the Catalan Union of Hospitals (CUH). The company is also noted for its social responsibility, in part by engaging in an activity that helps improve healthcare efficiency (such as the licence to supply tuberculin in Cuba through World Health Organization). Looking ahead, their goal is to consolidate and amplify their activities in the national and international environment, through Gesmed, a system that seeks savings in drug costs at a time when cost reduction is essential in maintaining any public or private health system. International Expansion and the Role of bridge   Its performance success on the peninsula has allowed Farmaegara to export their work to other countries, especially in Latin America, with markets that are close on a cultural level and that both have a strong need for the rationalization of health spending. The company operates in three countries in Latin America: the Dominican Republic, Colombia and Cuba, with self-owned enterprises. 64

The transport of products needed to maintain the cold chain is done by specialized companies.


Chapter 2 Business Cases

Moreover, given the great potential of the pharmaceutical industry in the emerging countries of Asia, the company decided to focus on producers in India and China in order to be able to offer their products in Latin American countries. Thus, the Catalan company functions as a bridge between two regions: the generic is bought in India, the capsules in China and, finally, these products are marketed in Latin America. In fact, the company’s first approach to the Indian company was through a bid from the World Health Organization (WHO) won in Cuba in 2009: upon obtaining it, they went to India to seek generic. This approach to other countries was carried out because of bad forecasts that the Spanish market had at that time and the impacts of the crisis, so they decided to expand, thinking about Latin America because of the cultural proximity. A company director said that, in his experience, the Indians see in Spain a good partner for Latin America and, also, they have a better understanding with Farmaegara than when dealing directly with the countries of Latin America (where they have little direct experience and ignore their culture). Penetration in Latin American countries is thanks to an extensive database of the prices of various Asian suppliers, enabling comparative studies of the domestic market prices and prices of Asian suppliers to be carried out. According to the company, internationalization always begins through a market study which attempts to get to know the internal situation of the country and is contrasted with economic and health related data. The company then discloses the savings that they might be able to make for their customers. Farmaegara does not only offer medicine and complete health materials, but also provides raw materials or packaging materials to producing industries in the countries of destination. The company has presented a governmental licence on 17 products registered under the brandname “FarmaEgara� in the Dominican Republic, of which five were awarded for their annual consumption. In the Cuban market several molecules are in the process of registration and agreements have been concluded with various institutions, and which are beginning to receive the first orders.

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Business Cases - Farmaegara After the price studies, the company made contact with international suppliers to get hold of the required products according to business needs, such as: market ready medicines, active ingredients, kits, consumables and food supplements. The close relationship with the partner in India helped to get the documentation and listing of almost any medicine for subsequent registration in different countries where the company operates. The Indian partner also certifies that the level of product quality is adequate. Something similar occurs with manufacturing partners in China. Upon review of the standards and quality certification, these producers offer the necessary documentation for registration and competitive prices of both semi-finished and final products. According to the company, once the manufacturers are approved, they sign cooperation contracts in which they give power of attorney for each product and which give them the possibility of registering and distributing such products in the agreed countires. The negotiation of the products is made from the headquarters in Spain, and these are sent directly from the manufacturers to the company offices located in the destination countries.


Chapter 2 Business Cases

Ficosa International The company Founded in 1949 in Barcelona as a family business, Ficosa (named Ficosa International SA since 1987) is one of the leading companies in the sector of suppliers of automobile components. The company is dedicated to research, development, production and marketing of systems and components for cars.65 Ficosa has established itself as one of the few global companies in its field and is currently organized into five major areas: Automotive, Industrial and Commercial Vehicles, New Technologies and Idneo and Renewable Energy. The company operates production centers (plants), technical and engineering centers and sales offices in 19 countries in Europe, North America, South America and Asia, and in 2010 had sales of 745 million euros and employed to 7,265 workers.66 The company has worldwide production plants. In Europe it has plants in Spain, France, Germany, Italy, Portugal, Poland and Turkey.67 In Asia and the Americas, Table V shows the names of the subsidiaries of Ficosa in those regions. 24% of company sales are made in Spain, 13% in France and 10% in Mexico. Then follow the U.S. and Brazil, with 8% and 7% respectively. The Asian country that captures the highest percentage of Ficosa’s sales is China, with 5% of the total. In terms of clients, the main customers are General Motors, with a share of 16.5% of sales in 2010, Ford (15.4%) and PSA (14.5%). Toyota and Nissan are the most important Asian customers. The company managed to remain a global player through the adoption of new technologies and the incursion into other various sectors (i.e., mainstreaming Offers rear vision systems, including mirrors, internal and external, painted and plastic components, fluid systems, command and control systems, including parking brakes, gearshifts, mechanisms for seats and doors, and cables of the unit. The company also provides the plastics and electrical systems, including windshield wipers, light cleaners, tanks/deposits, electric pumps, parasols and air ducts and security systems, such as lock and key systems, burglar alarm systems. 66 In 2008, before they felt the effects of the global financial crisis, Ficosa had reached 900 million euros in turnover. The information comes from www.ficosa.com and data sent directly by the company. According to information from Capital IQ (access June 28, 2011), the company expected to close 2010 with a net profit of 20 million euros ($ 27.4 million). 67 In 2001 Ficosa made a qualitative and quantitative jump by carrying out the acquisition of the Division of Magneti Marelli Mirrors, consolidating its presence in Europe and getting production operations bases in key countries such as Poland and Turkey. 65

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Business Cases - Ficosa International of technologies beyond the automotive sector). For example, in the last quarter of 2010 the company bought in partnership with Comsa Emte68 the Barcelona Technology Center69 from Sony Spain SA (which is linked to the Japanese Sony Corporation). With this transaction, the said center was divided into two companies: one focused on manufacturing, and controlled by Ficosa (made into a platform for innovation in manufacturing and electronic engineering), and the other focused on development and engineering (Idneo). Idneo is a new engineering proposal that is dedicated to research and product development and key integrated solutions. Through electronic engineering, Ficosa has become a technological associate of several clients from outside the automobile industry. Table V. Ficosa in Asia and Latin

[1] Civil engineering construction company. This technology centre produces LCD televisions, that is, liquid crystal technology.

68 69


Chapter 2 Business Cases

Operations on the American Continent Before the globalization process, and before car manufacturer’s attempts to reduce costs through “global platforms”,70 Ficosa opted for global market access, seeking operational efficiency and technological capabilities. First, the company moved to the US and Mexico in 1995, meaning the first plants outside of Europe,71 and afterwards more in Brazil and Argentina in 1997. The NAFTA72 market has been key to the Catalan multinational as their main customers continue being the major U.S. car manufacturers that produce both in the US and Mexico. The subsidiaries in these countries, Ficosa North America Corp73 and Ficosa North America S.A. of C.V., have been responsible for expanding the business. In 2006 an engineering center in Monterrey (Mexico) was created, thus reinforcing its technological capabilities in the NAFTA market, and in 2008 it acquired the assets and contracts of the American mirror producer Delbar Products (including a production facility in Tennessee), amplifying therein its presence in the same market. Even during the global economic crisis the company has sought to expand internationally (although the annual sales level went down by 11% with respect to 2008’s level).74 In the first quarter of 2011, Ficosa reached an agreement to acquire the U.S. company Camryn Industries, which manufactures car mirrors. With this move, the Spanish company was able to increase sales by 20% in the NAFTA economic zone and reach the lead in the production of wing mirrors in the region, with a market share of around 25%. [1] In the 90’s, car manufacturers began to cluster models to be sold worldwide and began operating under the concept of “global platform”, which consisted of grouping each model into families of similar models and construct them from the same platform for all markets in the world, increasing the ability to share resources and components among different models. This allowed them to greatly reduce development costs as with a single platform they were covering multiple markets, and in each market, sometimes different models. This phenomenon is driving globalization among manufacturers, which is then followed by their suppliers to ensure similar standards of quality. In this context there is also a progressive transfer to the suppliers of the responsibilities of design and product development. 71 The company had expanded into Europe in the 80’s. 72 NAFTA refers to the free trade agreement signed by Canada, Mexico and the United States in the early 90’s. 73 The company was founded in 1995, its headquarters in Michigan, and it also specializes in the manufacture of components for cars. 74 In September 2010, Ficosa acquired the assets of IMic (a subsidiary of Ichikoh) in Kentucky, within the framework of the alliance with Ichikoh described in the following section. 70

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Business Cases - Ficosa Internacional Operations in Asia In 1998 Ficosa made the leap onto the Asian continent implementing itself in India through a joint venture with the Tata Group (Tata Auto Comp Systems Limited), which seeks to venture into the industry of the manufacturing and supply of automotive components, particularly in India. Ficosa expanded in the subsequent years, opening its second and third production plants in that country in 2005 and 2006, and business activity is expected to increase still more. Currently, the Tata-Ficosa joint venture obtains revenues of 18 million euros in the Indian market. Japan, and its automotive sector, have been another important partner of the Spanish company. Toyota, Nissan and Honda are Ficosa clients. In addition, the company set up a technological-commercial office in the Country of the Rising Sun in 2001 and established a joint venture with the Japanese company Omron Corporation75 to create the company Adasens in 2008, dedicated to the development, production and marketing of ADAS technology (advanced driver assistance) for the automotive sector.76 This new business area is one of the pillars of the company in attracting new customers, and was 100% acquired by Ficosa in 2010 for its strategic importance. In 2010, the Spanish company announced a broad alliance with the Japanese company Ichikoh, from which emerged the first manufacturer of these types of rear mirrors in the world, in an industry that is highly concentrated among a few global producers (there are three major global manufacturers, as noted in an interview with a company executive).77 The agreement facilitated Ficosa’s acquisition of Ichikoh’s assets in the U.S., including a plant in Kentucky. The primary result of the alliance has been a supply contract with a major Japanese car manufacturer for an amount exceeding 120 million dollars.78 Producer of electronic machinery, precision equipment and medical equipment, among other types of machinery. The acronym comes from the name ADAS in English: Advanced Driver Assistance Systems. 77 Unlike the mirrors industry, the industry of gear changes and hand brakes have between 15 and 20 suppliers, so it has not yet produced a similar concentration. 78 Information obtained from a presentation sent directly by Ficosa headquarters in Barcelona, which is dated March 3, 2011. 75 76


Chapter 2 Business Cases

Given that since the global economic crisis the global economic panorama has changed dramatically, with increasing weight shifting to emerging countries, from 2008 much of Ficosa’s expansion has taken place in China. In fact, the expansion in China started from 2004 with the creation of Ficosa International (Shanghai) Automotive Components Co., Ltd., but, from 2008 they began building a new plant (the Chinese market increased by 47% in the industry’s worst year globally, in 2008)79 and sales have risen 7.5 times. Currently, Ficosa is projecting a new production plant in Taicang that will be operational by mid 2012, will replace facilities that the company already has in China and will double the current staff group in the country, reaching up to a thousand employees.80 With the objective that 30% of sales will come from Asian customers within the next five years, from 2012 onwards the company is to build further assembly centers in Beijing, Chongqing and Guangzhou.81

Currently, China generates 9% of group revenues. This is a major change in the business panorama of the company. Since January 2011, Ficosa has done business in China for the supply of gear changes (manual and automatic) and handbrakes with the following companies: Chery Quantum, Chery, Fiat (China), Shanghai General Motors, Ford, Guangzhou Auto and Toyota (China). Annual sales in China are estimated at 57 million euros for 2011, according to company sources. The role of bridge Ficosa’s expansion in Asia and with Asian companies, together with the strong position they have in the Americas, has granted the Catalan company the role of “bridge” between the two regions. Between 2006 and 2011, global sales of the company rose from 736.5 million euros to 806.3 (up 9.5%). While sales in Mercosur (primarily Brazil) increased by 75% over the same period to reach 54.1 million euros, the most spectacular leap came in Asia (India and China), Some of this information is obtained from an article published in La Vanguardia on June 1, 2010. The total investment would be 14 million euros. 81 Information disseminated in a article by Expansion.com of February 17, 2011.

79

80

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Business Cases - Ficosa Internacional going from 5.4 to nearly 70 million euros in sales (multiplying by more than 10). Thus, the volume of sales in Asia already exceeds the volume of sales in Mercosur. The bridge is simple: the Catalan multinational is the supplier of components for Asian automotive brands, whose cars are sold later in Latin America. Initially it was the big Japanese brands and the Korean Hyundai. However, the Chinese company Chery, which began selling cars in Brazil in 2009 (in partnership with the local group JLJ), is rapidly expanding to other Latin American countries. The role of bridge involves both sales of components for the production taking place in Asia (and later sold in Latin America) as well as sales to Asian firms that also have production facilities in Latin America. For example, sales in Brazil to Asian clients (Toyota, Nissan, Honda, Mazda, Hyundai and Chery) went from 3.9 to 11.6 million euros (an increase of 197%) between 2006 and 2011. Sales in Mexico for the same companies remained similar over the same period (4.6 million euros). Despite the close relationship between the co-national companies in some Asian countries, such as in the closed systems keiretsu (in Japan) and chaebol (in South Korea), Asian manufacturers find in Ficosa a good ally because suppliers from their own countries are faced with high barriers of entry into Latin America and Europe, being as they are culturally distant regions. The Spanish company, in contrast, counts on the geographical advantage in Europe and a cultural advantage from their “natural� markets in Latin America. Ficosa, also, has a larger presence on that continent than that of their European competitors, which makes them the ideal partner for Asians on both continents (because the Spanish company also has a significant presence in Europe). Any request from Toyota or Nissan, for example, would not allow a Japanese supplier to achieve the volume and economies of scale of the Spanish company.


Chapter 2 Business Cases

The sales outlooks for Ficosa in Latin America are particularly promising with Chinese manufacturers, who are expanding rapidly across the continent even in production plants. While the presence of Japanese and Korean brands is also growing in Latin America, Chinese companies do not have closed systems with close relationships with firms in their own country (such as those mentioned, keiretsuy and chaebol), so they would be easier clients for Ficosa on the continent. Furthermore, Ficosa is already Chery’s provider, so it has good prospects of cooperation with the brand at its plants in Brazil, Uruguay and Venezuela (they also plan to install a plant in Argentina, in alliance with the Argentine group Socma).82 Asian suppliers still represent strong competition after all and some of Ficosa’s businesses comes out of alliances with these suppliers. For example, under the alliance with Ichikoh, a sharing of market responsibilities was established: Ficosa is responsible for Europe, India, South America, the NAFTA zone (the USA, Canada and Mexico) and South Africa, and Ichikoh will take charge over Japan and the ASEAN zone. The integration of Camryn’s business would strengthen the link with Asian companies with Ficosa’s production units in the Americas. The reason is that Camryn works with two clients, Toyota (80% or so of sales) and Chrysler (the remaining 20%). Among the objectives of this acquisition is the taking advantage of economies of scale generated by the existing Ficosa NAFTA structure. With the Toyota penetration (1.5 million vehicles produced in the region), Ficosa has got a significant share in all major brands of car manufacturers in this market.83 Finally it should be noted that Ficosa’s role of “bridge” is not limited to the supply of components and could also be pertinent in the area of research and development. To strengthen this area, for example, the Catalan company [1] The plant in Venezuela is the most recent, which opened in 2010, and is greater than the first Chery opened in Latin America, in Uruguay (in association with the Argentine group Socma). The largest plant in Latin America is in Brazil, which has a budget of $400 million and will produce 150,000 vehicles annually beginning in September 2013. Investment in Argentina was announced by the government of Buenos Aires and spread in the newspaper La Nacion in an article of July 23, 2011. 83 This acquisition scheme would facilitate the reorganization of the production scheme in NAFTA: Crossville will focus on American clients, Kentucky on Asian customers, Berne in part exchange and Mexico in just-in-time for OEM plants in Mexico. 82

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Business Cases - Ficosa Internacional established a Technology Centre in 2004 in Mollet del VallĂŠs (Barcelona-Spain), which coordinates a network of technical centers the company currently has in the U.S., Mexico, Brazil, France , Italy, Germany, Portugal, China, Korea, Japan and India. The Technology Center has recently moved to facilities that the company has in Viladecavalls (Barcelona). More recently it also launched a Global Engineering Center in China, and from this country it integrates the different pieces with added value, such as mirror lighting, for use by all of Ficosa worldwide.


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Garrigues The Company Garrigues is the largest law firm and tax consultancy in Spain and continental Europe, with more than 2,000 professionals located in 29 offices throughout the Iberian Peninsula as well as international offices in Brussels, Casablanca, London, Miami, New York, Sao Paulo, Shanghai, Tangier and Warsaw. The company offers its clients comprehensive advice for all tax and legal matters in a personal and business like environment.84 Garrigues’s origins date back to 1941, the year in which the brothers Joaquín and Antonio Garrigues Díaz-Cañabate, both lawyers, created the office of J & A Garrigues. During the second half of the twentieth century, J & A Garrigues positioned itself as a leader in the Spanish legal landscape and in 1997, after the merger with Arthur Andersen and Legal and Tax Advisors (LTA), became Garrigues & Andersen and, with a team of nearly 600 professionals, was among the major European law firms. LTA, which had already been providing professional services in Spain since 1960, was recognized as a leading company in tax consulting in Spain, as well as in some of the branches of the law more closely related to business activity. In March 2002, following the demise of Andersen World Wide Network, the company chose to maintain their independence and now operates under the name of Garrigues. Garrigues is a professional limited company and falls into legal and fiscal advice area. Its main competitors are the major Spanish and international law firms such as Cuatrecasas, Uria Menendez, Clifford Chance, Freshfields, DLA, etc.. In 2010 it had obtained revenue for professional services of 352.8 million euros at the provisional year end (from September 1, 2009 to August 31, 2010). This The main areas of advice where Garrigues is involved are: commercial contracts and corporate law, European law and competition law, and regulation of insurance, administrative law, pharmaceutical and biotechnology law, mergers and acquisitions, banking and financial law, tax law, accounting law, real estate law, information technology law, telecommunications and audiovisual law, stock market law, labour law, maritime and transportation law, criminal law, sports and entertainment law, urban law, human capital services, litigation and arbitration, environment, intellectual and industrial property, restructuring and insolvency, regulating the energy sector.

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Business Cases - Garrigues amount represents a percentage increase of 5.53% in respect to the previous year. International expansion From its origins in Spain, Garrigues has been a pioneer in the internationalization of its legal practice, becoming the first Spanish law firm to open an international office in New York in 1973. It was also the first Spanish firm to open offices in Brussels in 1986. Since then, Garrigues’ international expansion has been based on the policy of “looking after their clients”, supporting them in their investment needs and accompanying them in their operations abroad. The international network of offices allows Garrigues to have a presence in some of the most important financial centers of the world and also in emerging markets. Table VI. The internationalization of Garrigues

The success of the Garrigues’ operations on an international level is based on two pillars.85 The first is integration into the local society in order to have a complete view of each country in which it operates, which is achieved through active involvement in the business, institutional and local academic world. The second is the coordination of its various offices operating in completely different markets, which is important given the increasing complexity of the transactions on which the firm is advising. Although the firm seeks to continue to expand internationally, they also mention that they seek to maintain corporate culture and service quality.

85

These factors are explained in an article sent to us by the company with information on their operations.


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The main link of the firm in an emerging market occurred in China, where business activity has increased significantly. In 2005, after obtaining permission from the Chinese Ministry of Justice, in what was until then was the only existing branch of a Spanish law firm on the Asian giant, was established in Shanghai. Years later, their main competitors followed suit: Cuatrecasas, Gonçalves Pereira opened their own office in Shanghai in 2007 while Uria Menendez did it in 2009, but in Beijing. Francisco Soler, Associate Director of the firm in Shanghai up to 2011, said recently that the Asian giant’s activity has risen from between 20% to 25% at an annual rate. The Director attributed this expansion to the growth of China’s economy and the surge in direct foreign investment it receives.86 The network and international capacity of the Spanish firm is seen intensifying with their participation in Affinitas, an Iberian-Latin American alliance promoted by Garrigues and solidly integrated, which brings together first-rate Latin American companies, recognized in Argentina, Chile, Colombia, Mexico and Peru.87 Garrigues also forms part of Taxand, a global network of tax firms belonging to more than 45 countries, which allows Garrigues to provide tax advice to its customers around the world. In late 2010 they announced new moves and alliances in Latin America. For example, after the running for more than one year of the Brazilian firm Barbosa, Müssnich & Aragão de Affinitas, Garrigues has decided not to incorporate a Brazilian exchange firm as a new member and has decided to open its own office in the South American nation, enjoying its partnership agreement with Schmidt, Valois, Miranda, Ferreira & Agel-Advogados. The strategy has been to associate with a local brand, as they did in their Uría moment with the Dias Carneiro office and recently DLA Piper with Campos Mello, as the Brazilian authorities The director made this comment to us in a telephone interview that was performed in September 2011. He had already made similar statements in an article published on CincoDias.com the March 23, 2011. In addition to Garrigues, on Spain and Portugal’s part, the other offices that currently make up the network are: Bruchou, Fernandez Madero & Lombardi (Argentina), Mijares, Angoitia, Cortes y Fuentes (Mexico), GómezPinzón Zuleta (Colombia), Barros & Errazuriz (Chile), Miranda & Amado (Peru). The international network currently has almost 3,000 professionals providing services from more than 40 offices located in 15 countries (source: Expansión.com in an article, December 30, 2010).

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Business Cases - Garrigues still do not allow foreign law firms to practice local law.88 This movement is key given the growing trade exchanges between China and Brazil, two of the major engines of the global economy today. The role of bridge A key aspect of Garrigues’ internationalization is the expansion in China and the role of the company as a “bridge” to link the business between the Asian country and other regions, particularly Latin America. The office in Shanghai is characterized by two main activities: legal advice to foreign companies, Spanish, Portuguese and Latin Americans, who want to invest in China, and advising Chinese companies looking to go abroad. Moreover, since most of China’s investment in Latin America comes from state enterprises, the Spanish company has raised the possibility of opening an office in Beijing. This role is based on the knowledge of the two regions: while Latin America is considered a “natural market”, knowledge of China comes gradually. In an interview, Francisco Soler reiterated the importance of the experience: “The fact that Garrigues has over 15 years accompanying its clients in its operations in China led to a our counting on our knowledge of the country, the market, and that we had contacts at all levels (institutional, corporate, from other law firms, etc.) which facilitated our entry.” In addition, a great many of the lawyers in the Shanghai office are Chinese.89 It’s also noteworthy that previous experience in an emerging zone such as Latin America is not necessarily useful for implantation in other countries such as China; there being large differences between the two countries, concrete experiences is not transportable. To be added to this are the various local regulations that affect the legal advice sector. In addition, Garrigues role of a Asia-Latin America bridge is gradually expanding to other Asian countries, as there are also already some operations with countries like Japan or South Korea, but it is emphasized that at present China is by far the Information obtained from a Expansion.com article, December 30, 2010. Only 4 of the 26 lawyers who have signed are foreigners, according to a CincoDias.com article

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most important country in this regard. They also intend to venture into India and have Indian Desk up and running, but in India foreign law firms face some local regulatory restrictions. When the firm advises on Asia-Latin America business issues, the coordination of offices in Shanghai and, say, in Sao Paulo or Buenos Aires, is fundamental: Soler notes that “our offices in Shanghai and Latin America work (often also with an office in Spain) in a collective and integrated form on business projects which this bridge produces. When, for example, Chinese companies invest in Latin America and want our advice, from the office in Shanghai we support the Chinese company in all aspects at the outset of the investment, in our Latin American office we support them throughout the entire implementation and, sometimes, from Spain we work on aspects of the investment structure when it is done through Spain.” Following Garrigues’s experience, there has been a dramatic increase in ChinaLatin America business, particularly in the last five years, and the sectors in which China has invested most in the region have been raw materials, energy, mineral resources and infrastructure, though the director tells us that lately a significant increase in the consumer goods sector is also being seen. They have also confirmed an increase in the Latin American presence in China, though much smaller in terms and figures than that which took place in the opposite direction. In this case the sectors have been more industrial and consumer goods and services. Finally, it’s fitting to note that Garrigues’ operations can be enhanced if Asian companies seek to use Spain as a platform for investments in Latin America. The Spanish company has mentioned three practical reasons where Spain has the advantage, apart from the knowledge they have in Spain of the natural markets in Latin America, and that could facilitate the said scenario: (i) the network of Agreements for the Promotion and Reciprocal Protection of Investments (BIT),

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Business Cases - Garrigues which aims to ensure that investments in foreign jurisdictions count on the standards of protection recognized under international law90, (ii) the network of agreements to avoid Double International Taxation (DIT), which aims to reduce or avoid double international taxation on income derived from the investment project by an investor resident in another country,91 and (iii) the tax regime of the Spanish holding company (the holding companies of foreign securities, also known as holding companies ETVE). These points are discussed in detail in the legal annex chapter, but suffice it to say that Spain is among the countries with the largest number of BITs signed with Latin American countries: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay, Venezuela and Paraguay. In addition, it currently has DITs signed with 11 countries, among which include Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, El Salvador, Mexico, Uruguay and Venezuela.

90 These protections mainly include the right to equality for domestic investment, the principle of non-discrimination, most favoured Nation treatment, guarantees against political risks, the right to repatriate profits and the return of capital and protection against forced expropriations without compensation. 91 The contracting States shall establish rules for distributing the tax sovereignty of different types of income, which is to recognize certain tax reductions or exemptions in the source country on income subject to tax in the investor’s home country.


Chapter 2 Business Cases

Miguel Torres S. A. The Company Miguel Torres S. A., or simply Torres, is a Catalan family business founded in 1870 that is dedicated to the production of wine for domestic and international consumption and in 2011 employed approximately 700 people.92 The company operates in 140 countries and sells not only wines its own vineyard, but also a further 55 brands and nearly 400 varieties of wines from other vineyards around the world.93 In Spain, Torres has more than 20 vineyards and two wineries in Catalonia and has also established a winery in the Basque Country (in the Rioja Alavesa, a town in Labastida) and most recently in Fompedraza Ribera del Duero in Castila y Leon. Among the oldest and well known brands of the Torres wines are to be found Sangre de Toro, Viña Sol and Gran Coronas. The company had a turnover exceeding 160 million euros in 2008, amid the global economic crisis, and the foreign market came to represent 69% of the total number of boxes sold (in 2005 this percentage failed to reach 50%). If you add up the income of the foreign subsidiaries (Chile and California, discussed below) and of the other companies such as Jean Leon and Torres Import, sales amount to somewhere around 200 million.94 In terms of technological development, it includes the Center for the Development of the Technological Industry among its associates, which is run under the Spanish Ministry of Science and Technology, which promotes technological development and innovation in Spanish companies. The company has among its priorities respect for the environment, being that it practices integrated viticulture where all waste water is purified and regional forests preserved. Some of the vineyards are certified organic and utilize biodynamic farming methods to achieve sustainable Data obtained from the company’s updated report on the Capital IQ web page, consulted on September 16, 2011. Information obtained from a report by Universia Knowledge Wharton (2010): “Torres uncorks its new growth strategy in China”, published on October 21, 2010. 94 Information obtained from an article published on Expansión.com on January 14, 2010: http://www.expansion. com/2010/01/13/catalunya/1263416432.html 92

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Business Cases - Miguel Torres S.A. productivity in the vineyards by using the ecosystem’s own resources. In addition, the company invests in renewable energy (solar panels and wind farms) and in hybrid cars and studies the use of biomass in the vineyard and forests. International expansion and China Torres’ expansion outside of Spain was driven by the members of the family. The first country was Chile, where in the late 70’s Torres became the first European winery installed with vineyards.95 In 1982, Marimar Torres, through the Marimar Torres Estate Family Vineyards, established the company’s first vineyard in California, in the US; in 1993 the winery was inaugarated and in the year 2000 they acquired more vineyards. Thus, family members direct the operations in both countries. The company also has operating subsidiaries that distribute products in Europe. In addition, in 2007 the Catalan company made an investment to acquire a 5% share of the Finnish winery Winestat Oy, that forms part of Helmet Business Mentors Oy,96 and investment was expanded in 2010 to reach 10%.97 The company reported profits of one million euros at the end of May 2010.98 In Latin America, as well as operations in Chile, Torres is part of the SAC Wine Distribution Company in Peru, and among its recent international operations the acquisition in March 2006 of 10% of shares in the Brazilian importer Reloco stands out. This operation was carried out along with Argentina’s Lagarde and the acquired company was renamed Devinum, its aim is to work with family wineries focusing on quality products.

The name of the subsidiary is Miguel Torres Wine Society, SA (Miguel Torres Chile). The vineyards in Chile grew with several expansions in 1985, 1990 and 2004. 96 This is a Finnish venture capital company that, among its investments, includes family business. 97 The additional acquisition of Winestat Oy was made together with the companies Tuomas Hirvonen and Operative Management, among others. This group of investors acquired 51% of the Finnish company. Operative Management increased its stake from 44% to 84%, and the rest belongs to Tuomas Hirvonen. 98 According to a Capital IQ report accessed online, September 15, 2011. 95


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After decades of operating in Europe and the Americas, the Catalan company turned its eyes to the growing Asian markets. In China, for example, where until recently wine was regarded almost as a rather exotic product, its marketing has exploded thanks to the growing middle class. However, the penetration of this market was not easy and had to overcome some initial losses. In the second half of the 90’s, when Torres began exporting their brand Sangre de Toro to China,99 the total volume of wine sold in China was less than 20 million nine-liter cases, while imports revolved around about 110,000 nine-liter cases. Still, in 1997 Torres established the first joint venture in China with Zhangjiakou Great Wall Torres Winery Co. Ltd and two years later would open the trade delegation from Torres Bodegas in China: Shanghai Torres Wine Trading Co. Ltd. A decade later the market landscape had changed radically. In 2009, the total volume of wine sold in China reached 93 million cases, while imports accounted for just over 10 million.100 The growth rate of Torres’ annual sales in China has been placed in double digits since the company set up an import business in 2002 for commercial and wholesale clients for markets as prosperous as Shanghai or Beijing. The Catalan company has thus become the second largest wine distributor in China. In 2010, Torres launched its first wine in China,101 in partnership with local wineries Grace Vineyards,102 and the total company sales in the Asian country reached approximately 16.5 million euros.103 Thus, after losing money for eight years, since four years ago Torres’ Chinese subsidiary has generated profits. In addition to distributing their wines in China, the group sells other prestigious European brands such as Vega Sicilia and Rothschild.104 To this end, the company has woven a sales network with offices in six of the country’s major cities, employing over two hundred people.105 This is the wine from the Torres brand that is most widely traded in the world. The marketed wine volume data was obtained from Universia Knowledge Wharton (2010) 101 The Symphony Series. It is a white wine that initially produced around 12,000 bottles. 102 Grace Vineyard is a wine company created by Chinese and French entrepreneurs in 1997 with its headquarters in the province of Shanxi. The company produces 1.2 million bottles a year, according to Universia Knowledge Wharton (2010). 103 Information obtained from Decanter.com, article, April 28, 2011: http://www.decanter.com/news/winenews/524105/torres-plans-major-expansion-in-china 104 In fact, Baron Philippe de Rothschild owns 10% of Torres China. 105 Some of this data was obtained from an Expansion.com article (January 14, 2010) already mentioned. 99

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Business Cases - Miguel Torres S.A. Although initially Torres focused on commercial clients and the wholesale business,106 it currently has a retail network with direct sales to consumers. The marketing strategy of the Catalan company played a role in making their brand understandable and attractive in China. Torres has opened several retail stores under the name of Everwines or Yongtao, which in Mandarin means “forever” (yong) “grapes” (tao). They also have two of the best vineyards in China in their distribution portfolio, Grace Vineyard and Silver Heights, and in partnership with them is developing new brands, which is providing the Catalan company with good recognition on the part of the Asian giant. It is interestingly to point out that Silver Heights was founded by a former employee of Torres, Emma Gao, who studied winemaking in France, which signals the Torres preference for working with ‘family’ companies whit a similar business culture. Torres has also focused on India where it established a joint venture with TT & G. Trading Private Limited, being the first Spanish winery to consolidate its presence in that country. The company has also formed a company together with three local partners and in company of another European family business: the manufacturer of Scotch whiskey Glenfarclas. The Catalan and Scottish companies own 50% of the capital and the Indian partners, the remaining 50%.107 Torres seeks to replicate China’s success in India, and so far has concentrated its efforts in the city of New Delhi, from where it seeks to create a distribution network to reach throughout the country. The role of bridge The role of bridge between Asia and Latin America that Torres plays in China is clear: the Catalan company sells wines from all over the world, among which are those produced in South America, and they sell on the Asian giant’s market. This type of bridge could also soon be able to extend to other Asian markets, where India stands out for the presence that it already counts on there.

106 The Catalan company even came to bottle wine in a plant west of Beijing in the 90s to save on fees, and experimented with growing their own grapes in the province of Hebei, although the weather is not always conducive for the crop. 107 Some of these data were obtained from an Expansion.com article, (January 14, 2010), already mentioned.


Chapter 2 Business Cases

Torres, through Everwines, sells various types of South American wines in China. Among them Chileans, that is, of Miguel Torres Chile, they sell Almaviva, Manso de Velasco, Conde de Superunda, Baron Philippe de Rothschild Maipo Chile Red Shield, Hemisphere, Storm, Santa Digna, some of these brands in different strains (Chardonnay, Cabernet Sauvignon, Sauvignon Blanc, Merlot, etc.). They also market some Argentine wines such as Salentein from the Mendoza area, and Callia, from San Juan. Everwines also has some Uruguayan wines on offer.108 While French wine sales continue to dominate Everwines, the Chilean wines outsell the Italian and Spanish. In 2010, French wines sold 7.5 million bottles, representing 46% of the total sales of Torres China, and 80% of these bottles were Bordeaux. In the same year 1.24 million of Chilean wine were sold, 1.16 million Italian and 1.02 Spanish. By 2013 the Torres group plans to have 62 Everwines stores in China, doubling the number of existent shops in 2011.109 Much of the extra production of wines to meet this growing market will come from South America.

108 109

[1] More information about the products sold in China can be found at: http://www.everwines.com/index.html Information obtained from the aforementioned Decanter.com article of April 28, 2011

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Business Cases

Port de Barcelona The Company The Port of Barcelona is the main infrastructure of transport and services in Catalonia and a port of reference in the Euro-Mediterranean region. Its area of influence extends throughout south-central Europe, as well as to the north of Africa and is the European port to markets as distant as the Far East and Latin America. With more than 100 scheduled lines operated by 163 owners that connect the Catalan capital with 850 ports on the five continents, the port’s specialized in general cargo and high value added goods, including consumer goods, electronics and vehicles. The Port generates approximately 32,000 jobs (14,000 of which are direct). Its economy accounts for 1.4% of the GDP in Catalonia, since 77% of the economic sectors of the autonomous community are clients of the Port. In 2010, it channelled goods worth 50.244 million euros, which is equivalent to the channelling of 71% of Catalonia’s external maritime trade and 21% of the Spanish total. Although the Port operates as a single unit, it is highly diversified and, it could even be said, that there are five ports in one: (i) the commercial port,110(ii) the energy port,111 (iii) the cruise port (which has 7 terminals), (iv) the logistics port112 and (v) the city port. In recent years there has been an intense process of the concentration and specialization of the terminals going on, which has privatized management and are operated under concession by companies that compete with each other. Currently, the Port has more than 30 terminals for merchandise specializing in freight containers, vehicles, coffee and cocoa, fruit, steel products, liquids and bulk solids, and passengers. 110 They have two large container terminals (TCB and Tercat), both being expanded to reach a combined capacity of 5 million annual TEU (TEU is the unit of measure equivalent to a 20-foot container). Another strategic traffic Port is that of new vehicles, managed by two specialized terminals: Autoterminal and Setram, while in the levy free dock the main terminals dedicated to bulk solids (grain, soybeans, minerals, cement, etc.) are concentrated. 111 Is responsible for channelling of natural gas in throughout Spain, in addition for concentrating the receipt and distribution of gasoline, diesel and biodiesel for the automotive industry. 112 ZAL (Logistics Activities Zone) of the Port of Barcelona is an intermodal centre that offers services through the Service Centre as well as a strategic location, its own customs regime, an integrated telecommunications service, economies of scale and synergies between its companies.


Chapter 2 Business Cases

It’s noteworthy that the port’s activity is not only concentrated in the port area and neither does it end at the boundaries that define the docks and its border with the city. The Port is the gateway to a hinterland that extends throughout the Iberian Peninsula and beyond national borders to reach Europe and North Africa. With the aim of bringing port services to operators and end customers, the Port Authority has created a network of inland maritime terminals in the territory.113 Conceived as local infrastructure, the inland maritime terminals help the operators and loading companies (importers and exporters) to create more efficient supply chains and to better route products. Expansion and the Chinese outlook in Barcelona   The Port is currently immersed in a major process of expansion to increase its surface area and loading capacity, and this has much to do with the recent strengthening of trade with Asia. Access to the Mediterranean through the Suez Canal situates the Port of Barcelona as a key place for traffic to or from Asia, and it is starting to be identified by firms in the Far East. This is because, although the Mediterranean ports have not historically been the gateways to Europe,114 channelling through them allows a 3 day reduction of in the navigation of vessels in respect to doing it in the major Northern ports like Rotterdam or Antwerp. According to company information, between the months of January and April 2011 the Port of Barcelona has handled a total of 695,016 TEU (one TEU is equivalent to a 20-foot container), representing an increase of 18% over the same period for 2010.115 Growth has been driven primarily by the strong performance of export cargo, which has grown at a rate of 16%. The There are a total of five marine terminals with different objectives: Maritime Terminal Zaragoza (Ebro rail corridor and north of the peninsula), Toulouse Maritime Terminal (customers located in the north of the Pyrenees, Mid-Pyrenees and Aquitaine), Container Terminal Saint Charles, Perpignan (one of the main logistics centres and of distribution of fresh products and vegetables in southern Europe), dry ports in Coslada, Madrid, Azuqueca de Henares and Yunquera de Henares, Guadalajara (serving in the logistics centre of Madrid), Intermodal Terminal and Terminal Ampurdán Lighthouse Vilamalla, Gerona (for intermodal freight logistics activity). 114 The Apex Project reports that in 2010, only 24% of traffic from Asia and passing through the Suez Canal is unloaded in the ports of southern Europe. The rest is discharged in the ports of northern Europe, specifically through Hamburg and Bremen in Germany, Rotterdam in Holland and Antwerp, Belgium: http://www.apice-project.eu/ content.php?ID1=&ID2 = 30 & ID = 30 & ID3 = & lang = ENG 115 In terms of weight, the Port has dealt with the transport of a total of 14.5 million tons of cargo, up 9% over the same period in 2010. Of this amount, 9.5 million tonnes is general cargo (including containers, and represents the most valuable commodity). 113

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Business Cases - Port de Barcelona geographical areas that have been the most dynamic are South-east Asia (+54%), the Middle East (+24%), the Far East and Japan (+14%) North Africa (+11%), Eastern Mediterranean, Black Sea, the Caspian, and Gulf of Mexico (+8%). In terms of traffic volume, China maintains its role as the main trading partner of the port, which is the origin or destination of 23% of all containers that pass through the port. In 2004 the Ministry for the Environment had diverted the mouth of the Llobregat river two kilometres to the south to allow construction of two fundamental pieces in the expansion: the implementation of the southern dam and the extending of the east dike, that they completed in 2008.116 With this they achieved the doubling of the surface area in respect to that of the year 2000, reaching 1,300 hectares of land, in order to satisfy the businesses with an ever growing number of Asian clients. To finance all these works the Port of Barcelona has employed various mechanisms of financing: equity (cash flow), the Cohesion Fund (as in the construction of breakwaters), debt (through the European Investment Bank) and private equity. During the period 1997-2011 more than 3,000 million euros were allocated for the works, of which about half have come from private capital. The investment forecast for the period 2010-2011 is 638 million euros, of which 473 come from the private sector. It is due to China’s interest in this route that the infrastructure resources come from the Asian giant. The Chinese group Hutchinson Port Holding (HPH),117 is a private company and the world leader in container terminal management, in 2006 it became the largest shareholder of TERCAT,118 and the group currently has a 100% concession on the expansion of the new container terminal at the 116 The levees are maritime security elements that generate a space of protected waters where cargo terminals can be built 117 Hutchinson is the largest port operator worldwide. The operations of this Chinese company are expanding to 51 ports in 25 countries. Its presence in Asia is relevant, and especially China – where it operates 10 ports and where it has developed a logistics network and interior rail system to deliver door to door service called Port Logistics Centre - and in Hong Kong. Also in Korea, Indonesia, Malaysia, Myanmar, Pakistan and Saudi Arabia. In Latin America it has terminals in Buenos Aires, Mexico and Panama. 118 The board of the Port Authority of Barcelona (APB) approved the new project the Chinese company had presented, which until then had made a total investment of 515 million euros. The agreement between the concessionaire and the APB also involves increasing the surface area of the terminal, with the possibility of a second future expansion. The infrastructure was expected to be operational in 2011.


Chapter 2 Business Cases

Port of Barcelona (Catalunya terminal).119 According to information obtained in July 2011 on behalf of the Port, it will double capacity with the Chinese company’s investment in the Muelle Prat Terminal, with a total investment that would exceed 500 million euros. This is the first and only container terminal that HPH manages in the western Mediterranean for all its trading with China and with it hope to turn Barcelona into its main hub for Southern Europe. Entrepreneurs and the Catalan authorities are aware of the potential and the corresponding efforts have been made to position the Port of Barcelona before China as a gateway to Europe for its business. For several years, the Port had planned trade missions to China (2000) and India (2004), and have collaborative agreements with some of the major ports in the area (for example, in Ningbo, Shanghai and Qingdao in China). The Port maintains permanent representation in China and Japan.120 Promotion initiatives have intensified in the last couple of years, especially after the global financial crisis and the implications this has had on the role of emerging countries. That is why a municipal delegation visited the Shanghai Expo 2010 to promote the city as a logistics and commercial hub.121 The delegation members participated in conferences at the Shanghai Sino-European business school CEIBS (linked to IESE) and one of the topics was the “Port de Barcelona, your gateway to Europe”.122 The Role of the “Asia-Latin America Bridge” and Looking to the Future The Asia-Barcelona connection, which has been greatly strengthened, can be further reinforced by a Barcelona-Latin America connection under certain circumstances or collectives. The Panama Canal, for example, is currently saturated and expansion will be delayed for at least several more years. The current situation leads to serious delays in transit and the diversion of an The terminal, located in Moll Prat will have a capacity to handle over 2.5 million TEUs annually. http://www11.portdebarcelona.es/cclink/grupaje/ESAgrupajen5.html Information obtained from a LaVanguardia.com article on August 30, 2010. 122 Other conference topics also highlight other strengths of Barcelona as a city, “Barcelona, landing platform in Europe”, “Barcelona, the Mediterranean innovation hub”. 119

120 121

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Business Cases - Port de Barcelona increasing amount of traffic between Asia and the Atlantic coast of America through the Suez Canal as an alternative to the Panama. This alternative route is strengthened by the fact that the Suez Canal allows the passage of larger sized vessels.123This circumstance would give to the Mediterranean ports a certain role in traffic between Asia and America,124 The role that the Port can play in the Asia-Latin America connection would be enhanced by the fact that the Port of Barcelona’s offices outside of Europe are located in China, Japan, and Buenos Aires. Barcelona’s strategic position has not only been identified by Asian companies, such as Hutchinson. For example, the South-America Atlantic Coast service, a joint service between Maersk and MSC, permits the connection, via Barcelona, of Latin America with the AE-11 services of Maersk or Dragon Express of MSC, both bound for the Far East. MSC, in this sense, is one of the shipping companies that have most decidedly chosen Barcelona as a trans-shipment point. Furthermore, the Danish company Maerks and its sister company Safmarine offer a new weekly service, called Rumba, linking ports in India and the Middle East with cities in Brazil and Uruguay, and these ships will pass through Barcelona (and other Spanish ports such as Algeciras and Valencia ).125 Port of Barcelona sources state that the port must find more Asia-Latin America connections via Barcelona, a connection currently focused on simple transfers. It is noted that Barcelona is not intended to be a pure transhipment port, as with other ports, and that it generally seeks to carry out activities that add value, other than the stevedoring activity alone (as would be the case, for example, with added activities in the automobile trade). This does not yet happen with Asia-Latin America transportation. With respect to pure transhipment activities, in the Mediterranean there is a lot of competition, and stowage prices, a determining factor in these cases for the choice of port, are very tight. 123 The Panama Canal does not allow the transit of vessels of more than 366m in length and 49 meters wide, capable of carrying up to 12,000 TEU in containers, which have proliferated in recent years (Financial Times, 6/16/06). 124 Also the Spanish port of Algeciras has positioned itself as a major transit and load distribution centre. 125 The Rumba service will pass through Jebel Ali, Nhava Sheva, Jeddah, Genoa, Barcelona, Algeciras, Tangier, Santos, Itajai, Paranagua, Montevideo and Rio Grande.


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In terms of numbers of transport, we see that the trans-shipments from Asiaport of Barcelona-South America reached 15,159 and 18,160 TEUs in 2009 and 2010 respectively126, while the transfers in the opposite direction were far lower: 1,518 TEU and 1,540 in 2009 and 2010 respectively.127 If we compare these figures with the total traffic for the Port of Barcelona with Central and South America in 2010, which reached 152,802 TEUs, and with the Far East, which reached 739,042 TEUs in the same year, we see the scarce relevance Barcelona’s role as a shuttle between the two areas currently has in comparison to general transport with the same separately. As mentioned, this role could be enhanced if the Port de Barcelona aims to capture more pure transfer or offer value-added activities to the Asia-Latin America trade.

126 TEU (Twenty-foot Equivalent Unit) is the unit of measure of capacity of shipping containers. A TEU is the capacity of a standard 20 ft container. 127 Data provided by the Port of Barcelona.

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Repsol YPF The Company Repsol YPF SA is an integrated energy company with operations in over 35 countries (Table VII shows the countries where the company has operations and interests) in the areas of exploration, production, refining and marketing (crude oil and natural gas) and in new energies. The company has its origins in 1987, when the National Institute of Hydrocarbons created Repsol SA as a result of the restructuring of the Spanish oil sector128 and adaptation to the changes that happened on a worldwide basis. In April 1997, the privatization of Repsol took place, which had lasted eight years. Between January and June 1999, Repsol acquired 97.81% of Argentina’s YPF SA,129 resulting in a multinational company more balanced and better positioned. Today, much of the company’s assets are concentrated in Spain and Argentina (approximately 20% of the consolidated assets of the company are to be found in the South American country).130 The company employs a total of 43,298 workers and, as of December 31, 2010, had total revenues of 55.5 billion euros, representing an increase of 17.5% over the previous year (in 2009, In contrast, revenues had fallen by 21.7% due to the global financial crisis). The value of the market capitalization of the company is 28.9 billion euros. The company markets its products through the Repsol, Campsa and Petronor brands. During the first quarter of 2010, the company had interests in seven refineries (in Spain, Argentina, Peru and Brazil), and operated 4428 service stations.131 128 The group takes its name from the brand of lubricants marketed by REPESA, for its visibility and as it’s easy to pronounce in different languages with the aim of becoming a leading brand of prestige and global recognition. Its activities encompass the exploration, production, transportation and refining of oil and gas. Repsol SA has 5 subsidiaries: Exploration (formerly Hispanoil), Oil (formerly Enpetrol), butane (former Butano SA), Campsa and Petronor. Repsol Química (Alcudia), initially a subsidiary of Repsol Petroleum, later one more subsidiary. 129 Fiscal Oilfields. 130 Data obtained from the Repsol YPF S.A. company profile published September 28, 2010 by Datamonitor 360. 131 Data from Capital IQ in a report published on June 1, 2011.


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Repsol YPF’s operations are divided into five business segments: (i) upstream (exploration and production of crude oil and natural gas), (ii) LNG (Liquefied Natural Gas), (iii) downstream (transport, distribution, refining and marketing) (iv) YPF (integrated activities realized by YPF) and (v) Gas Natural (Repsol has a 30.8% stake in the company Gas Natural).132 Table VII. Regional interests of Repsol YPF S. A.

Expansion in Latin America Repsol began its process of internationalization, particularly in Latin America, while at the same time the company was being transformed from a state-owned to a private one.133 Repsol’s key acquisition was that of the Fiscal Oilfield (FO), an Argentinian public company founded in 1922 dedicated to the exploration, production, refining and marketing of oil and its derived products.134 After the company was renamed YPF SA in 1992 it became Argentina’s largest company, employing some 50,000 people. When it was acquired by Repsol in 1999, it was the largest oil and gas public company in Latin America and number 12 worldwide in terms of reserves. After a public offer and negotiations with the Argentine government, Repsol bought the equivalent of 14.99% of YPF shares for 2,000 million dollars (becoming the largest shareholder). Subsequently, Repsol made a bid of 13.4 billion dollars for control of the entire company and the new company became the tenth largest oil company in the world in terms of market capitalization.135 Data obtained from the Company Profile of Repsol YPF S.A. published on September 28, 2010 by Datamonitor 360. Among the largest businesses in the region agreements with Petrobras stand out for the exchange of upstream assets in Brazil (1999) and the agreement to participate in the development and exploitation of oil and natural gas in Mexico, through a contract of international services aimed at these activities in the Monterrey-Reynosa plant (2003). 134 YPF was the first vertically integrated state owned oil company worldwide. 135 The political concern then was that the new company formed by Repsol and YPF would come to dominate the Argentine energy market: 56% interest in oil production, 75% in gas production, 51% of all gasoline service stations. 132 133

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Business Cases - Repsol YPF From 2002 onwards, Repsol YPF, as a joint business, began to expand to other countries through its various business areas. Its operations have been, then, very diverse. In its early years in Latin America, the company became a leading producer of oil and gas in Venezuela and also began exporting natural gas from Bolivia to Argentina. It also inaugurated pipelines in the latter country. In addition, the company also made other sales operations in South America, indicating the dynamism of the company for realizing new business in the region.136 Today, the company has oil and gas reserves primarily in Trinidad and Tobago, Peru, Venezuela, Brazil, Ecuador, Colombia (in addition to Libya, Algeria, Spain, and the US-the Gulf of Mexico). In the oil sector, the recent discoveries of oil fields in Brazil are key for the business of the company and have resulted in, as we shall see shortly below, the recent partnership with Chinese compnay Sinopec.137 On the other hand, a consortium led by Repsol YPF, involving companies from India and Malaysia, was awarded a project in February 2010 to develop heavy crude oil in the Orinoco reserves in Venezuela, one of the largest undeveloped deposits of hydrocarbons in the world.138 In the natural gas sector, Repsol YPF has 5.25 million customers in Argentina, Colombia, Brazil and Mexico for its distribution. In March 2010, the company signed an agreement with the governments of Bolivia and Argentina, that meant Repsol YPF was to become the main supplier of fuel in these countries. In terms of gas production, the company signed an agreement, in November 2009, with the government of Bolivia to develop the Caipipendi block. In addition, the company is one of the largest distributors of natural liquefied gas - NLG (Liquefied by pressurization; LNG is its acronym in English) in the world, and Spain and Latin America are its main markets (particularly Argentina, Chile, Ecuador and Peru ). The operations of Colombia should be noted (in 2007 it sold its interests in the distribution of liquid fuels in Chile to the organization Terpel), Bolivia (in 2008 sold its 51% stake in Repsol YPF Bolivia Gas, leaving packaging activities and marketing in that country) and Brazil (sold in 2008 the network of service stations: Alesat Combustiveis). During the year 2011, several YPF S.A. share operations were carried out. 137 In 2005, Repsol won 16 exploration areas off the coast of Brazil in the productive basins of Campos, Espiritu Santo and Santos. The company made discoveries in deep water, in 2007, the Carioca oil field in the Santos basin; in the next two years they discovered the Guará field and other additional reserves in the same basin. 138 For this reason, an agreement was signed with the government of Venezuela to create the company: PetroCarabobo. In addition to Repsol YPF, the other companies who will be involved in this project are India’s ONGC and Malaysia’s Petronas, the American Chevron, two Japanese firms and the Venezuelan Suelopetrol. 136


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In Peru, the company has a 20% stake in an LNG project currently being carried out by the company Peru LNG. Expansion in Asia Repsol YPF’s relationship with Asia is of a fairly recent nature, highlighting the partnership with China’s Sinopec (the second largest energy company in the Asian giant).139 In recent years, Repsol YPF’s strategy has contemplated sending liquefied natural gas from Peru LNG’s plant140 to China (where the demand for this resource has grown at a rapid pace in recent years due to the production of electricity). Despite these plans to participate in the Chinese market, up to 2010, the company was not associated with any company in China. However, given the significant oil discoveries the company has made in the deep waters of Brazil since 2005,141 and in order to exploit these reserves, in October 2010 it announced the sale (through a capital increase) of 40% of the Brazilian subsidiary to Sinopec.142 With the entry of the Chinese company, Repsol YPF will be able to cover all the investment necessary to capitalize on the discoveries made in the past three years.143 Sinopec’s investment in Repsol Brazil was the third largest cross-border acquisition in 2010 in Latin America and the third largest Chinese investment in the world (ECLAC, 2011). In fact, Sinopec’s investment in the Brazilian division of Repsol supposes the biggest oil deal made abroad by China since the buying Addax Petroleum for 8,000 million dollars in 2010, with the aim was of procuring reservations in Iraq and West Africa. Sinopec is a state owned company where the Chinese government holds a 75.84% of their titles. Repsol has a major stake in Peru LNG, which in turn has a commitment to supply 70% of its production to Mexico (the remaining production could be sent to China). 141 In 2005, Repsol obtained 16 exploration areas off the coast of Brazil in the productive basins of Campos, Espiritu Santo and Santos. The first business of the company in Brazil dates back to 1999 when they signed some agreements with Petrobras in exchange for assets (to boost upstream operations in Brazil). 142 The sale was made through a capital increase of the subsidiary amounting to 5,200 million euros. Currently, the assets of Repsol in Brazil are valued at 7,800 million euros, affirmed the company chief, Antonio Brufau, in the article sent to the National Securities Market (information reviewed in El Pais on October 1, 2010). 143 In fact, the synergy is rapidly paying off. In January 2011, Repsol Sinopec made, with its partners Brazil’s Petrobras and Britain’s BG, an additional discovery of good quality oil in the ultra-deep waters of the Santos Basin. 139 140

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Business Cases - Repsol YPF Besides the agreement with Sinopec, Repsol YPF has also expanded into other Asian countries in very diverse areas of business. For example, shortly after the agreements with Sinopec it announced that the company had reached an agreement with Malaysian industrial group UMW for the manufacture and distribution of Repsol lubricants in Malaysia, China, Singapore, Brunei, Papua New Guinea and Burma. In addition, the company signed a contract with the state-run company Korea Gas Corporation (KOGAS) for the LNG supply to the Asian market from its Peru LNG plant (Asia is the natural market of Peru, all countries being in the Pacific zone). The role of bridge In the Repsol YPF-Sinopec synergy in Brazil, the Spanish company utilized its experience, know-how and oil reserves, but needed additional resources to be able to make use of them (before this operation, the company had plans to float its capital on the São Paulo stock exchange to obtain the resources needed to explore the resources of the Pre-salt layer). For its part, Sinopec has the resources but not the sufficient knowledge to make investments of this magnitude in a region that is not its “natural market”. However, one must be cautious and recall that while Sinopec may benefit from the Repsol experience, it has not “entered” Brazil thanks to the Spanish company. In fact, the Chinese company was already present in the country, where it has several operations going on. The agreement with Repsol is a further step in the strategy undertaken by China in recent years to take greater control of energy sources on a global level (mainly to satisfy its domestic demand for fuel),144 and Brazil is the country in the region with the greatest potential growth.145 The partnership with Sinopec in Brazil is due to the same motivation to diversify risk, but the peculiarity is that the said association was made through a capital increase, not sold. The percentages agreed (60% Repsol, 40% Sinopec) have 144 Other Chinese companies such as CNOOC and Sinochem Group Ltd have also invested heavily in the oil sector in Argentina and Brazil, and all investments have been made since 2010. 145 The magazine America Economia, in its online edition of October 27, 2010, makes an analysis of the objectives and perspectives of this synergy.


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moved both the directing organs as much as the Board of Directors, on which ten members will sit 10. The Spanish oil company appointed the president and six of the ten members, in proportion to its 60% stake in society. The current director general of Spanish oil exploration, Nemesio Fernandez-Cuesta, serves as the president of the Brazilian subsidiary, while Graciano Rodriguez Mateos continues as the CEO.146 Thus, we find a more intimate way of working, where both companies are involved in the management and governing bodies, providing an opportunity to deepen relationships with Sinopec. In an interview with José Carlos Vicente, Director of Upstream Business Development, highlights the good and quick negotiations with Repsol as part of a “constructive attitude, genuine win-win perception and understanding of the values of the other party”. There are other arrangements where the Spanish company also acts as a “bridge” between Asia and Latin America. There is Spain-India-Malaysia consortium for projects in the Orinoco reserves in Venezuela. In the natural gas sector, the operations realized by the Peru LNG project also involve a kind of triangulation, as the Spanish company sells the gas produced by the Latin American country in Asia. What this tells us is that the role of bridge can be expanded to diverse business areas and by different objectives, sometimes commercial (such as the sale of natural gas) and sometimes in terms of investment (as is the case with with Sinopec).

146

According to an article published by El Pais on December 29, 2010.

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Singapore Airlines The Company and Its International Operations   Singapore Airlines is dedicated to the transport of air cargo and passengers, airport terminal services, engineering services, pilot training and charter flights, among other activities. The group operates in East Asia, the South-West Pacific, Europe, West Asia, Africa and the Americas. Its headquarters are in Singapore and it employs 33,222 people (as of March 31, 2010).147 The group recorded revenue of 8,900 million dollars during the year ending March 2010 (FY 2010), a decrease of 20.6% compared with the fiscal year 2009. The decrease was mainly due to the reduction of the airline’s operations and cargo activities during the global economic crisis. Net income (which was $151.3 million dollars in the fiscal year 2010) went down by 79.7% when compared with the fiscal year of 2009.148 Some of the company’s most important agreements are found in Asia. For example, the company has formed partnerships with companies such as the Hong Kong and Shanghai Banking Corporation (HSBC) so as credit card customers of the said bank can earn travel points with the airline.149 The SIA cargo division150 has also reached joint venture agreements with groups such as the China Great Wall Industry Corporation and Dahlia Investments to have cargo operations in China. Some of the main destination countries are China, India and Japan. However, the company has set its sights beyond Asia, and Europe is one of its key destinations, as much as a final destination as for the role the continent has in connecting with other parts of the world. In 2006 the Singapore - Paris flight was inaugarated, and in the same year the company extended its services of a shared code with Virgin Atlantic Airways so as to be able to operate flights from 147 The predecessor of the airline, Malayan Airways, was founded in 1947. In 1966 the company Malaysia-Singapore Airlines was formed and shortly afterwards in 1972 the company split to form two separate airlines. 148 Data from the business report published by Datamonitor 360 on February 28, 2011. 149 Agreement signed in 2004. 150 This is a subsidiary of Singapore Airlines and was incorporated in 2001.


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London to Los Angeles, San Francisco and Dubai (although it should be noted that the company also has direct flights between Singapore and some cities in the U.S.). The role as hub or bridge that London has played in connection with certain destinations is similar to what it’s planning to do with the Barcelona El Prat Airport for destinations in South America. Spain and Barcelona’s role as bridge In late 2010 Singapore Airlines obtained permission to operate the route between Barcelona and São Paulo in a shared code with Spanair.151 The flight began operating in March 2011 and is an extension of the route between Singapore and Barcelona, that Singapore Airlines offers daily with a technical stopover in Milan.152 The new route will operate three times a week, and in this case the airline has eliminated the flight change in the Italyn city. The fact that the Asian airline has chosen the El Prat airport to effect its flight change to Latin America is not down to chance and influenced largely by, as well as Barcelona’s strategic location and good infrastructure, the experience it has in Spain in terms of frequent air connections with several cities in the natural markets of Latin America. Singapore Airlines, along with many other Asian companies, have already identified the potential for growth in Latin America. However, there still exist many “barriers” before these companies will fully enter this region that is not their natural market. Tan Tiow Kor, the airline’s Vice President of Sales and Marketing, said to iAdvisory/iNews in Singapore that “given the differences in culture, language and local customs, it helps to have a strong and respected contact at the local level to introduce us to the appropriate business partners with whom we can form a team to win the confidence of the key actors, such as local logistics companies, the carriers and airport authorities”.153 This is where Spain and Barcelona are taking the opportunity to serve as a bridge between the two regions. Singapore Airlines is integrated into Star Alliance, as well as Spanair. That is, the Asian company maintains the connection between Barcelona and Singapore with a frequency of seven times a week. This route began operating in 2006. 153 The article can be found in www.iadvisory.com.sg 151 152

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Business Cases - Singapore Airlines Ferran Soriano, president of Spanair, stated that the new route is a step towards the transformation of Barcelona airport into a hub on affirmation of the airline alliance that the two companies belong to, Star Alliance, which has the most cities directly connected to Barcelona, has s celona, ecte154 In addition, El Prat has increased connections to destinations outside Europe by 75% in the last five years and, as part of this process, launched a new intercontinental route with Miami operated by Iberia.155 The airline’s CEO, Choon Phong Goh, hinted at the possibility of new routes that will connect Singapore to South America that will go through Barcelona Airport. Although destinations are yet to be reported, in the opinion of the Barcelona Chamber of Commerce (member of the Development Committee of Barcelona Air Routes) they should hopefully be to connect the city with the capitals of Argentina, Chile and Colombia.156 In addition, they hope that Brazilians will use Changi Airport as a gateway to the Asia-Pacific region. Barcelona and Spain should without doubt be alert to a greater expansion of routes to South America, particularly due to the 2010 Open Skies Agreement between Singapore and countries like Brazil.157 In addition, although SIA cargo has already been operating in Brazil over the past few years, and also in other Latin American countries, freight transport is an area that also has great potential for growth. On the other hand, attracting these types of operations frequently brings other types of businesses and investments with them. For example, the Spanish Institute of Tourism, Turespaña, have just announced that along with Singapore Airlines they have signed a memorandum of understanding with the aim of encouraging and promoting tourist arrivals to Spain from Australia, New Zealand, Indonesia, the Philippines and Singapore, locations where the company operates.158 This agreement is the first the company has signed with a European destination,159 In an interview published on March 28, 2011 on Finanzas.com. Information obtained from a EuropaPress.com article of March 28, 2011: http://www.europapress.es/catalunya/ noticia-singapore-airlines-opera-primer-vuelo-barcelona-sao-paulo-20110328094056.html 156 The news was published in an article on Expansión.com on November 24, 2010. 157 Business Travellerpublished online, January 12, 2011, an article with the details of this flight. 158 News published on finanzas.com, June 20, 2011. 159 The airline had already reached similar agreements in other parts of the world: Australia and Malaysia in 2007. 154 155


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and both parties will explore and carry out activities to promote the inflow of tourists to Spain, through the Singapore Airlines services operating between Singapore and Barcelona. The arrival of more Asian tourism to Spain in turn can reinforce the idea that it is a gateway for increased tourism to Latin America.

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Telefónica The Company Telefónica is one of Spain’s most emblematic companies, with the highest levels of internationalization and a global leader in the telecommunications sector. Suffice to say, it’s a company that employs over 280,000 workers and has 1.7 million direct shareholders.160 The company provides communication solutions, information and entertainment. It offers land line services, mobile telephones and services, broadband, Internet, television, among other value added services and media. In 2010 it had approximately 288 million customers and the company reported that the medium-term objective of their overall strategy “Bravo!” is to have a customer base of 320 million in 2012.161 The company has not been, however, immune to economic cycles such as the global financial crisis that erupted in 2008: Revenues in 2009 were EUR 56.7 billion, representing a fall of 2.1% over 2008. However, net income increased 2.4% in the same period.162 By 2010 it recorded revenues of EUR 60.7 billion (7.1% more than in 2009). Figure XIII. Telefónica revenue according to regions with subsidiaries (%), 2010

Note: It does not add up to exactly 100%, the remaining revenue comes from other sources. Source: Based on information from Telefónica 160 The largest shareholders of the company are BBVA Asset Management, SA, SGIIC and Banco Bilbao Vizcaya Argentaria, S.A. The exact number of employees worldwide is 284,352 according to the company report published by Capital IQ, May 25, 2011. 161 This strategy rests on four pillars: the client, the offer (as service provider), new platforms that promote an efficient operating model transformer and a common culture that builds trust with partners. 162 Net income for 2009 totalled 7.8 billion euros. This data was obtained from the company report published by Capital IQ on May 25, 2011.


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The company has three subsidiaries: Telefonica Spain, Telefonica Europe and Telefonica Latin America. Figure XIII shows that the Latin American subsidiary generates 41% of the company’s global revenues, significantly more than what is generated in Spain itself. Such a volume of revenue is down to Telefonica having significant market shares in these zones, particularly in the mobile sector. The subsidiary in Latin America owns 100% of equity in companies in the following countries: Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Uruguay and Venezuela.163 The company also partially participates in Telesp and Vivo in Brazil, Colombia Telecom and Telefonica Peru.164 Overall, Telefónica has 22 subsidiaries companies operating in the region. It’s worth pointing out that although Asia does not generate revenue for the company, Telefónica does have offices in China. Initially, the Latin American subsidiary was also included in that office and in partnerships with Chinese companies. This type of organization is a little unusual because it oversaw Asian operations from Latin America. Part of the reason is that the expansion of the company has been achieved through a model that sells its products in Latin America and acquires the materials for their production from Asia (particularly China). Relations with China are now dependent on the corporation. Given that alliances with Asia go hand in hand with business done in Latin America, we will continue by explain the expansion in both regions. Expansion in Latin America The company began its international expansion in the late 1980s, a period in which it entered the Latin American market, which has since then been the main bastion of the company’s expansion.165 Through its policy of acquisitions, Telefonica has become the second largest mobile telephone operator in Latin America and one of the largest on the planet.166 Something that has changed The companies involved are subsidiaries of Telefonica Mobiles (in Argentina, Colombia, Chile, El Salvador, Guatemala, Mexico, Panama, Peru, Uruguay), Telefónica de Argentina, Telcel Venezuela, Otecel Ecuador, Nicaragua and Terra Cellular Networks (Brazil, Chile and Mexico). 164 This also includes the subsidiary Telefónica Data in the United States. 165 Two of the company’s first important acquisitions were made when it acquired a stake in CTC and Entel, Chile, and Telefonica de Argentina, in the early 1990’s. 166 Until recently, it had an operational presence in three continents, but Medi-Telecom was sold in Morocco, which was the only interest they had in Africa. 163

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Business Cases - Telefónica in recent years, apart from the global crisis and the strengthening of emerging countries, is the aggressive growth of America Movil in Latin America, which is already the leading supplier in the region. Telefonica’s position today is still very strong in almost all of the region,167 Figure XIV shows the Movistar’s (Telefónica’s new brand) market share in the mobile phone sector in some Latin American countries. The market shares in countries such as Peru and Chile make Telefonica the leading provider (they also have a significant position in Argentina, Chile and Peru in the land line market with a share in 2010 of 47.8%, 58.4% and 93.8%, respectively).168 However, mobile phone shares fell between 2008 and 2010, before and after the global crisis, in almost all countries of the region. The only exception is Mexico, where Telefónica has plans for expansion.169 But in Mexico as much as in some other countries of the region, America Movil has a dominant position.170 Figure XIV. Telefonica’s mobile phone market share (Movistar) in Latin American countries

Source: Based on data from IHS Global Insight 167 According to information obtained from IHS Global Insight, almost 48% of capital expenditures in 2009 was spent at Telefónica Latin America, compared with 45% in the previous year. 168 Information obtained from Datamonitor 360. 169 The company will strengthen in Mexico with the expansion of the land line sector. In June 2010, a consortium of Telefonica and two local groups, Televise and Mega cable, was granted a 20 year license to operate two dark fibre lines in the country for $69.6 million. 170 Its revenues nearly doubled between 2007 and 2010 to reach 35.5 billion euros.


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Recently, Telefonica’s main objective has been expansion in Brazil, the largest Latin American market.171 Until 2010 Telefónica operated a land-line unit (Telesp) and part of the mobile phone company Vivo, which was carried out as shared investment with Portugal Telecom. However, in July 2010, Telefónica bought a 50% stake in Brasilcel (which, in turn, controls 60% of Vivo) which was owned by Portugal Telecom.172 The company thus gave an end to the joint venture in Brazil it had run with the Portuguese company since 2002. This operation represented Telefonica’s largest financial transaction of 2010.173 After an recently realized operation, Telefónica will take control over only one company, instead of two, due to the consolidation of Telesp and Vivo into one single operating company. Basically, Telesp will buy Vivo as part of a restructuring process and Telefonica will own 91.8% of the shares in the new company.174 Thus Telesp will become the largest telecommunications company in Brazil. Expansion in Asia and China Telefonica’s approach to Asia already has some history and has been deepened through recent alliances with Chinese companies. When the company began to grow in Latin America it found a growing number of Chinese suppliers seeking to enter emerging markets like Latin America. Thus, already in 2004 Telefónica was the main foreign client of suppliers like Huawei and ZTE that offered telecommunications equipment and material at competitive prices.175 From this supply relationship, and together with the interest of the Chinese authorities by the experience with Telefonica in a strategic region for them as Latin America was, Telefónica’s office of representation in China opened in 2005.

171 According to the SWOT analysis presented by Datamonitor 360, in 2010 the number of mobile subscribers in Latin America grew by 8% over 2009. Brazil was the largest mobile phone market in Latin America, with a total of 169.7 million subscriptions. Mobile penetration in the region would reach 117% by 2020, with Brazil reaching 259 million subscribers. 172 The purchase price was 7.5 billion euros. 173 While the company expanded its interests in the South American giant, it is also apparent from its participation within Portugal Telecom, which generated Telefonica a cash flow of EUR 631 million, according to its annual report sent to the U.S. Telephone Securities and Exchange Commission. 174 GlobalTelecomsBusiness.com 175 Chinese companies that provide telecommunications equipment. Huawei is the second largest globally behind the American Cisco and ahead of France’s Alcatel Lucent.

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Business Cases - Telefónica Some months later, Telefonica bought 5% of the Chinese operator Netcom (CNC, based in Hong Kong), for about $500 million. Telefonica International (a subsidiary of Telefónica that later became Telefónica Latin-America) got involved after an agreement to acquire an additional 2.22% stake in CNC.176 Moreover, in January 2009 in what was a wave of business effected by Telefónica on a global level (particularly on a European level), Telefónica signed a cooperation agreement with China Unicom to strengthen their strategic ties. While buying Brasicel (Vivo) from the hands of Portugal Telecom became Telefonica’s largest investment in 2010, the major financial outlay in 2009 was the purchase of a larger stake in China Unicom.177 According to IHS Global Insight, Telefonica currently holds (in the first quarter of 2011) an 8% stake in the new company that resulted from the merger of China Netcom and Unicom,178 which operates as the second largest Chinese company in land-lines and mobile phones. With the most recent investments announced in January 2011, Telefónica goes from owning 8% to about 9.7% of the company’s capital (plans for September 2011)179 As a result of the purchase of cross-holdings, Telefónica and its shareholders approved on May 18, 2011 the appointment of a Director appointed by the Asian company. The president of China Unicom, Chang Xiaobing, will be its representative on the Telefonica Board, according to market sources. The Chief Executive of Telefónica, César Alierta, is already a member of the board of China Unicom.180 The strategic alliance had confirmed thier cooperation on several fronts: (i) in the development of infrastructure and equipment, (ii) the development of a common platform for mobile services, (iii) joint purchases of new technologies, and (iv) the provision of joint services to multinational clients. Information based on the business report published by Datamonitor 360 in December 2010. As part of this alliance, both companies agreed to the exchange of shares whereby each party invests the equivalent of one billion dollars in the shares of the other party. 178 The companies merged in June 2008 and Netcom became a subsidiary of China Unicom. 179 According to information from Capital IQ, the last transaction with China Unicom involved a total of 508.6 million dollars. The Chinese company reached a 1.37% stake in Telefónica. Press release with details of operation: http://saladeprensa.telefonica.com/documentos/nprensa/NP_20110123__Press_Release_ES.pdf 180 Article published by El Pais on January 24, 2011. 176 177


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Telefónica as a Bridge Between Latin America and Asia The internationalization of the company can then be summarized in two processes. On the side of sales (the demand side), Telefónica expanded to their natural markets, which can be defined from the point of view of geography (Europe) and from the cultural point of view as is Latin America’s case.181 From the production standpoint, on the other hand, the company has forged new alliances with businesses in other regions, particularly Asia, and has served as a “bridge” to connect the production of Asian and Chinese companies with the Latin American market. Telefónica’s ties with ZTE and Huawei are an example of this “vertical” alliance, where the telecommunications teams Huawei and ZTE, made up in China, go directly to their destination in South America. Telefónica exercises its role as a “bridge” between Latin American and Chinese companies. The bargaining power of Telefónica and its relevance as a client convinced the Chinese supplier to establish a major base of operations for Latin America in Madrid, above all for the knowledge that the Spanish company has of the said market in areas as diverse as alternative financing, culture, government relations, and more complex issues such as the macroeconomic context, the management of exchange rate risk, etc. What has changed is that emerging markets have become more important after the crisis and it is here that the greatest opportunities present themselves. A challenge for Telefonica is the recent presence in America Movil in Latin America, and its competitive advantage will lie in the alliances that enable it to innovate, reduce costs and explore other markets and, here, China is a key player. Cooperation between Huawei and ZTE would reduce costs and innovate. In addition, Telefónica along with China Unicom aspires to obtain synergies and to penetrate the Asian markets through a rather more “horizontal” partnership. 181 Latin American market can be considered a natural given the historical, cultural and language ties that are held with Spain, which allows it to better understand markets and how to do business.

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Business Cases - Telefónica Unlike its main competitors such as Vodafone and France Telecom, whom have significant operations in Asia, the Spanish company still doesn’t have a significant presence in the region in terms of markets consumption.182 On the other hand, the fact that for Asian companies Latin America is not a natural market, could bring Telefónica additional business opportunities in the long term. At the close of this study a major strategic agreement between Telefónica and China Unicom was announced, signed within the framework of their global cooperation, reinforcing the role of bridge between Asia Pacific and Latin America for both firms. This is an agreement to share international interconnection nodes in those countries where the companies do not have a presence. Under the pact, which also includes cooperation for mutual support in marketing and customer service, Telefónica will be able to use so-called points of presence or nodes in the China Unicom’s network in Hong Kong, Japan, Singapore, Australia, France and Sweden. Meanwhile, China Unicom will use the Telefonica’s international points of in Argentina, Brazil, Chile, Colombia, Ecuador, Guatemala, Panama, Peru, Venezuela, Mexico, the US, Puerto Rico and several European countries.183 In terms of innovation, the experience that has been forged by cooperation with companies such as Huawei has led to other types of businesses. In 2009, the company launched in Latin America, together with the Chinese company, the first commercial services based on the Service Delivery Platform solution (SDP, its acronym in English) in search of new opportunities in mobile Internet. The platform will facilitate new services184 and reduce operating costs through the reuse of resources and already integrated business operation systems. In March 2010 these two companies launched Movistar IVY the first smartphone android on the market. Also in the first quarter of 2010 it reached an agreement with ZTE to develop handsets for the Movistar brand, its first cooperation agreement in the terminal area. Over 7% of the revenues of Vodafone, for example, come from India. It should be noted, however, that Vodafone sold its stake in China Mobile in September 2010. 183 According to an article in Expansion November 21, 2011. http://www.expansion.com/agencia/efe/2011/11/21/16718821.html 184 Some of the services are marketing and mobile advertising, in the management of email accounts of users, storage and short messages on the internet. 182


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The company has also turned its eyes to the LTE networks (3G technology for wireless capability) and has done pilot tests in several European countries, and in Brazil and Argentina.185 Among the sales partners are Huawei and ZTE. It’s also important to point out that not all alliances that the company has in Asia are with China. To facilitate the expansion in business services, Telefónica took charge of the Japanese supplier NEC in 2010 in order to provide it with the platform and applications to provide cloud computing services across the region. Another area of opportunity is the mobile market in Latin America. Mobile phone penetration in the region was 90% in 2010 and is only expected to continue to grow along with the increasing population and levels of disposable income in the region, and the entire smartphone expansion, that still has only low market penetration there.tiene

185 The potential market for Telefónica are: (i) broadband and pay TV, Duo-Trio demand boundles; ADSL products, new mobile services (m-banking), telemedicine, etc..

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Chapter 3. Types of Bridge: Analysis of Business Cases As we saw in the previous chapter, alliances of Spanish companies with Asian companies go very much hand in hand with the business of the first mentioned in its “natural market”, which is Latin America. Often, Spanish companies have served as a “bridge” so as Asian companies will have access to that market. That is why in the business cases of this chapter we’vw provided a brief overview of how companies in Latin America expand ed, so that we can understand the context in which they have done business with Asia. Although all cases have that they show some kind of “triangular” or “three way” alliance in common, in which a company functions as a “bridge” that links the two other regions, it is clear that the types of business and the way in which the bridge operates are very different. Although most cases are of Spanish companies, we also include examples of Asian businesses and one case of a Latin American business that can take the initiative to unite the three continents. For the Chinese companies Huawei and ZTE, suppliers of Telefónica, it was the Spanish that facilitated their entry into Latin America. However, the initiative is, at times, Asian, as in the case of Singapore Airlines, which decided to start its flights to Brazil from Singapore with a stopover in Barcelona, taking into account logistical considerations and also taking advantage of the huge traffic between Spain and Brazil. Therefore, it is also important to understand the motivations of foreign companies. 3. 1 Definitions The reasons that companies have, both Spanish and foreign, to expand on an international level and form alliances determine the type of bridge that companies are creating. In order to determine a ranking of the classes of bridge that we observe in business cases, we start from the theoretical discussion made


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Types of Bridge: Analysis of Business Cases

by Soler (2007) on the issue of triangulation and bridges in Spain. In this study we observe that the types of bridge in which Spanish companies are involved have increased. Following on we specify the definitions that we use in this study. Soler identifies five types of bridges or forms of triangulation:186 commercial, cultural, fiscal, logistical and business. Although the author further explains each type of bridge, based on his discussion we can deduce the following definitions (in a summarised form): (i) cultural bridges allow two regions to become closer by means of a third actor who has cultural links with other two (eg, US - United Kingdom - Europe); (ii) fiscal bridges allow an arbitrary margin for multinational companies, who can choose the more favourable tax jurisdictions; (iii) the commercial bridges facilitate the “avoidance” trade barriers in a certain country/region while operating in any other country that is a trading partner of the first (for example, the production of Japanese companies in Mexico to meet the demands of the U.S. market); (iv) the logistics bridge is the one that is closer to what could well be called a “physical” bridge (figuratively speaking), because geography and infrastructure play an important role; (v) business bridges include all kinds of forms of cooperation between companies, including acquisitions. Cooperation can be oriented towards the penetration of a certain market, the development of a new technology, and also includes vertical relationships of the client-provider type. Soler argues that of these five types of bridge, Spanish companies have been involved primarily in two: in bridges for business and in logistics bridges. The fact that Spain’s belonging to the European Union does not give them the working margin needed to be the basis of fiscal or commercial bridges, means it’s unable to establish itself as a country with a favourable tax structure or as a hub of international trade relations. In this study we adopt a different definition for some of the bridges identified by Soler. For example, if in the definition of commercial bridges we add that 186 In this study we do not use the term triangulation because it is a term that seems to force the links Asia-SpainLatam, which does not fit with the new reality of the global economy and strength in emerging markets. That is why we use the role of “bridge”.

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Types of Bridge: Analysis of Business Cases the barriers that they seek to evade so as to be able to trade with other countries include, in addition to rates and tariffs, cultural barriers and other barriers that arise from the lack of knowledge some certain countries have on other countries’ markets or regions, then some of the bridges Soler considered as the business type could be considered rather as part of a commercial bridge, because the companies involved would give help to foreign companies during their entry into new markets in other regions. This means that not only the countries, with different tariffs and trade agreements, can act as commercial bridges, but also companies, as they help to overcome other types of non-trade barriers. This type of bridge could be called a commercial bridge supported by business agreements. The crux of the difference is that the definitions given by Soler focus on the mechanisms that facilitate a bridge rather than the objectives of the bridge. For example, in what he calls a business bridge the mechanism of the bridge are agreements between companies. But companies can have several objectives upon entering into such agreements. Often companies make business agreements with foreign counterparts because they seek to expand commercially in other regions. Here we call this concept a commercial bridge, since that is the ultimate goal of the business agreements in question. Thus, if we focus on the objectives of the bridge, for a business bridge to exist we would have to have agreements involving companies from the three regions. In other words, a Spanish company would facilitate the closure of business agreements (such as share buying or acquisitions) between an Asian and a Latin American company. In our study we would add two other types of bridges. In the first we classify Spanish companies offering business and consulting services in Asia, based on market knowledge we have of the natural markets in Latin America. This can be called a knowledge bridge. This type of bridge would also include cases in which Asian companies benefit from the legal and tax consultancy of Spanish firms who know the legal framework of Latin American countries well. Furthermore, if we consider a broader definition of the commercial bridge, if the consultancy


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in question is to eliminate trade barriers, that come about when Asian companies are not familiar with the environment of the countries where they want to invest, then you may also consider it as a commercial bridge whose base or “tool” is knowledge. The other type of bridge is the finance bridge. It is also supported by business agreements but the ultimate goal of these agreements is not commercial expansion in other markets but access to the corporate financial resources of a country to finance projects in another country, and where Spanish companies act as intermediaries, partners or facilitators of the agreements. In summary, in this study we consider six types of bridge: commercial bridges (which have several subtypes as seen below), financial bridges, business bridges, logistics bridges, knowledge and tax bridges. 3.2 Summary of the Business cases Table VIII shows the different types of bridges relevant to our study. The commercial bridge, in particular, is divided into several mechanisms that can facilitate a bridge of this nature. Apart from issues of tariff and trade agreements between countries, we have the role that other factors play, particularly business agreements, to overcome “intangible” barriers to trade. These agreements include all forms of cooperation between companies, either through horizontal agreements, as in the constitution of joint ventures, or the acquisition of a company by another, such as through vertical agreements of client-provider type.

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Types of Bridge: Analysis of Business Cases Table VIII. Summary of different types of bridge

In a commercial bridge, the Spanish associate can offer its Asian partners through business agreements access to its “natural” markets (Europe and Latin America), in exchange for a commercial presence in Asia (horizontal alliance) and often in combination with other “perks” such as low-cost manufacturing (vertical alliance). Access to the Latin American market can materialize as Asian firms would minimize transaction costs associated with the cultural difference or limited access to information about these countries. Moreover, while Asian companies have some knowledge on Latin America, sometimes direct implementation in this region is not justified at the present because of the scarce volume of sales, or the risks associated with the geographical area and new products.187 Telefónica has vertical business alliances with its Chinese suppliers of 187 According to the gradual internationalization model, discussed by Soler (2007), Asian companies could use their subsidiaries in Spain as a provisional bridge to Latin America, when the volume of this market still does not justify direct implantation, or unknown risks that discourage the installation. 188 The fact that the vertical alliance (ie, partnership with suppliers) will be “downwards” means that Telefónica is the company that produces the final goods and services, while Chinese suppliers produce intermediate goods. 189 These Chinese suppliers directly compete with giants like Alcatel Lucent.


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technological systems Huawei and ZTE,188 who are competitive in terms of costs.189 This type of vertical alliance is called “downward” because the Spanish company is the client who sells the end goods and the Chinese companies are the suppliers. These alliances could be considered as part of a commercial bridge because the Spanish company would be facilitating, indirectly, the trade of these Chinese companies in Latin America (in other words, the Chinese companies are selling their supplies to meet Latin American demand for Telefonica’s end products). The business alliance with Telefonica is simply constitutes a means to facilitate the comercial bridge.190 Telefónica’s relationship with Huawei and ZTE is based in what we call value chains, which is, in partnerships to produce certain end goods/services. Torres is another example of a commercial bridge where the Catalan company markets wines produced in South America. Although generally vertical alliances are associated with the value chain, an interesting case is that of Farmaegara. The Catalan pharmaceutical company has “downward” vertical alliances with pharmaceutical suppliers in India and China, but the business relationship was not limited to the value chain but also formed a joint venture with Asian companies so as to be able to grow in the Latin American market, which tells us that there would also have been financial cooperation. There also exist “upwards” vertical alliances, such as in the case of another Catalan company, Ficosa, which is a supplier for Japanese car producers. In this case, it’s the Spanish company seeking new markets. Comercial bridges can also be based on horizontal business agreements. For example, Telefónica aspires along with China Unicom to obtain synergies and to penetrate Asian markets. The same could be said of agreements between BBVA and CITIC,191 which would allow the Spanish bank to have access to Asian markets (and, viceversa, the Chinese bank could eventually enter the Latin 190 There would be a business bridge if Telefónica would have provided either ZTE or Huawei a business alliance with a Latin American company. However, other business agreements these Chinese companies have in Latin America they made on their own account. 191 A bank can also can be considered as part of commercial bridges because, although it does not trade in goods, it is involved in the trade in services. 192 José Ignacio Galán Zazo, Director of the Ibero-American Chair of Business at the University of Salamanca/ Banco Santander, said in an interview (Wharton Universia, May 4, 2011) that the business model of China BBVA was different from the other Spanish banks, being a hybrid strategy that combines the holding type business and the cooperative, and this may bring costs in terms of capital added to the structure of the business. Santander’s strategy (cooperative type), involves less risk, greater possibility of appropriation of know-how and intangible assets related to trade relations with Latin America.

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Types of Bridge: Analysis of Business Cases American market).192 If market access is surely the principal goal in many cases, companies have made associations may also have secondary objectives such as looking for financial investment opportunities or access to capital and funding sources without necessarily having expansion to other markets in mind. For example, although BBVA and Repsol YPF have reached “horizontal” agreements with Chinese companies through acquisitions and associations, the difference is that BBVA was seeking a financial partner to invest, and maybe form the basis from which to expand into new Asian markets, while the first mentioned company sought a financial partner that would inject capital so as to be able to expand in Brazil (and Repsol YPF would give in return access to the knowledge and natural resources of Latin America). As such, Repsol Brazil’s acquisition agreement on behalf of Sinopec representss a finance bridge as investments in oil exploration in the South American country are being made with an injection of Chinese resources, and Repsol acts as the intermediary or bridge. Within the financial bridges we could also classify alliances that do not involve mergers or acquisitions, as is the case of BBVA with the Japan Bank for International Cooperation (JBIC) in which the Spanish bank has acted as a funds donor and risk management assessor for JBIC on the investment projects of the latter in Latin America. Within this category we too could include BBVA’s agreement with the China Development Bank, as the objectives are similar. Then, some horizontal business agreements would form part of both commercial and financial bridges and even logistics (Singapore Airlines association with Spanair) depending on the ultimate objectives of such agreements. It should also be pointed out that there are various ways of carrying out business agreements: BBVA bought a percentage of the CITIC Bank’s capital, Sinopec bought part of Repsol YPF’s subsidiary in Brazil, while Telefónica entered into a purchase agreement for cross-sharholdings with China Unicom. On the other hand, Farmaegara formed a joint venture with Asian companies so as to grow in the Latin American market.193 The Garrigues case is different because the Spanish These joint venture agreements are interesting because they break with the idea that Spain, or their companies, could not act as cultural bridges between Asia and Latin America because the historical and cultural ties are not strong on the Asian side. Farmaegara executives have said that Spanish companies often have a greater affinity with Asian companies, in particular if the affinity with companies in India has facilitated the entry into Asia. In this new reality of strengthening emerging countries paradigms are changing and it’s necessary to redefine the bridges that Spain can be involved in.

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Lawyer’s firm didn’t form alliances with other companies but became established in China through greenfield investments. It’s definitely a new market, where the Spanish firm provides legal services to Chinese companies seeking to do business in Latin America, a region that the Spanish legal advisers know very well. Given the nature of the Garrigues business, this case is classified into the type of bridge that we have called knowledge, based primarily on human capital. The company offers services that are based on good knowledge of the local legal framework, institutions and business environment in Latin America. There are other examples of knowledge bridges. For example, the fact that BBVA has been in charge of risk management for JBIC tells us that the Japanese bank is taking advantage of BBVA’s knowledge of the region (in terms of loans, investment projects, risks, etc.). Therefore, it could also be classified as a bridge of knowledge. What makes the Garrigues case more interesting is that their services involve several types of bridge. Firstly, we can classify it as a bridge of knowledge, given that the business of the firm is to offer advisory services to Chinese companies. Secondly, it can also be considered a knowledge-based commercial bridge, because the legal firm often encourages Chinese business activity in Latin America through its advocacy, by removing barriers to trade that would be generated when Chinese companies did not know the legal framework for investment in the countries where they want to invest.194 It should be noted also that tax advice is an important part of the package of services, so that knowledge gathering also has non-trade objectives. While one can argue that Garrigues is not a fiscal bridge itself (as companies only have the benefit of one country with tax benefits),195 the Spanish firm itself can influence the fiscal decisions of Chinese businesses. The bridge that Cemex has formed also has human capital as its basis, through 194 Trade barriers can be classified as trade barriers (such as tariffs and customs duties) and non-trade barriers. The lack of market knowledge is a non-trade barrier. 195 This cannot be considered a tax bridge in the strictest sense because it only applies to countries. Garrigues can advise on how to obtain tax advantages, but they themselves do not directly provide a tax advantage to companies. 196 Fernando Gonzalez, CEO of CEMEX for Europe, the Middle East and Asia is Mexican.

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Types of Bridge: Analysis of Business Cases a synergy of Spanish and Mexican executives.196 Cemex Spain leads the Mexican group’s operations in Asia because their executives have already formed a good know-how there and are knowledgable on those markets. However, the Cemex case can be considered as a business bridge as Cemex Spain has provided, being in charge of them, investments and acquisitions that the Mexican company makes in Asia to expand into new markets. We could also classify here Sinopec’s buying of shares in Repsol Brazil, where Repsol YPF, as the parent company, would be in charge of negotiations within the business bridge. The other type of bridge that has been common is the logistics bridge. In the two cases presented in this report, that of Singapore Airlines and of the shipping companies that are opting to transport their goods through the Port of Barcelona, the decision to connect up in Spain was partly influenced by its geographic location. However, the objectives and characteristics of the “bridge” are different. With the rise of Asia and trade flows between emerging countries, the Mediterranean Sea is regaining the role it played in the first millennium of our era. It’s much faster to travel by sea between Europe and Asia via the Suez Canal and the Mediterranean than to bring the same goods across the Pacific and the Atlantic. Aware of this logistical advantage, the Port has actively made efforts to attract new customers wishing to transport their goods, which in its case has been more important than forming alliances (although it should be noted that they have made joint investments in infrastructure with Chinese companies).197 The shipping companies, as clients, have been convinced by questions of logistical cost and efficiency.198 Singapore Airlines, however, focuses on the transport of people and the finding of new markets through its new routes to Latin America. The way the Asian airline looked to operate more safely in Spain was through the formation of a joint venture with Spanair, which has benefited from having a financial partner.

It is as much China’s interest in this route that along with the infrastructure resources coming from the Asian giant. The Chinese group Hutchinson Port Holding (HPH), a private company is the world leader in container terminal management, in 2006 it became the largest shareholder of TERCAT, the group that has the concession for the expansion of the new container terminal at the Port of Barcelona (Catalunya terminal). 198 Other factors that determine the creation of a hub are the availability of human resources, ease of customs formalities, the country’s access to trade agreements, loading and unloading and tax issues. 197


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The fact that there are several types of bridges shows us that there are business opportunities. Positive results from companies such as Telefonica that have dealt with the crisis (particularly the net profit, which didn’t fall) tell us that some things were done in an adequate way and that the expansion of Telefónica in emerging countries, primarily Latin America, may have contributed to better results for the company amid the economic turmoil affecting developed countries to a greater extent. With the growth of emerging countries, this is the moment to do business with them.

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Chapter 4. The Role of Cities Cities constitute a fundamental factor in developing countries and the importance of urban areas has increased due to their ability to form poles of development in which the interactions between different industries that conglomerate there to generate economies “to scale”. Cities allow the creation of clusters, access to human capital is concentrated there and there’s a faster flow of knowledge, which is increasingly important in innovation-oriented economies. The gathering together of human capital, infrastructure and innovation generate prestige for the city, and there is a growing tendency to count on “branded” cities: New York and London are the cities of Finance, Paris is seen as a city of fashion and the city of Bangalore is the software city. Before the growing weight of emerging countries in global trade and the expansion of trade and investment links between Asia and Latin America, there is potential for Spanish cities to create their own “brand” to attract some of that business, which as we have seen is feasible given the link between Spain and its natural markets in Latin America. As we saw in the business cases, Barcelona already plays an important role as a logistics centre through the Port of Barcelona, which distributes a growing body of Asian products, and as a hub for Singapore Airlines flights to Latin America. Also, such cases show that several businesses in the city have a role as commercial bridge (Farmaegara, Miguel Torres) or production, and can even involve R & D (Ficosa). However, maintaining the “quality” of the said brand is essential in a global economy where the role of emerging countries is growing and an increasing amount of cities can compete with the Spanish ones. According to the Global Cities Index,199 five of the ten most global cities in the world are to be found in Asia and the Pacific: Tokyo, Hong Kong, Singapore, Sydney and Seoul. Three of them are located in the U.S. (New York, Chicago and Los Angeles) and only 199

Published by Foreign Policy, A.T. Kearney and the Chicago Council on Global Affairs.


Chapter 4

The Role of Cities

two in Europe (London and Paris). According to a McKinsey Global Institute study that selected the 600 most important cities based on their contribution to global GDP growth between 2007 and 2025, within 15 years a third of today’s developed cities will abandon the ‘City 600’ list, giving way to other new cities (many of them in China, although the importance of cities in India and Latin America will also increase). Thus, the global economic map will see its key urban centre shift towards the south, and more significantly to the east. 4.1 The role of Barcelona as bridge It is therefore encouraging that Barcelona’s role is not limited by its geographical position (which together with its infrastructure facilitates maritime and air traffic) and that industries based on innovation and knowledge have come along, which is what it takes to continue to compete on a worldwide scale. In particular, intiatives have been created such as the District22@ (knowledge-based industrial space), the University of Barcelona Science Park and the park of innovation at ESADE Business School, Creapolis, which advocates for innovation, but from different and complementary angles, and as clusters (see also the section on educational exchanges, which contains several initiatives that position the city between Asia and Latin America in academic aspects). Barcelona will continue to be the headquarters of the Mobile Congress (GSM) held every year, and with 22@ to organize the World Innovation Summit (HIT), a number of conferences on innovation and entrepreneurship involving small businesses from around the world. The efforts are paying off, because in 2010 Barcelona was awarded with the Eurocities Awards 2010 prize in the innovation category, during the Eurocities network General Assembly, leaving cities like Dublin and Edinburgh behind. The city was recognized thanks to the talent attraction program ‘Do it in Barcelona’. Together with the push that it has given to the knowledge industries, Barcelona has its eyes on Asia, as does Spain in general, seeking to be a platform for China and the rest of Asia in Latin America. The city of Barcelona organized in July 2011 the Spain-China Forum VI,200 a foreign policy forum that brought together http://www.foroespanachina2011.org/index.php?idpagina=1&idioma=cas

200

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The Role of Cities representatives from the worlds of business, politics, academia, education.201 And October of the same year marked the taking place of the first China at Barcelona Summit, a meeting with Chinese companies interested in Barcelona as a platform for access to Southern Europe and the Mediterranean region, and also in the connection with Latin America. For its part, the Global China Business Meeting, which also took place in Barcelona in 2008, emphasized that the links between Spain and Latin America are one of the advantages that the Spanish Government wants to use its ties with China. The governments of Catalonia and Barcelona have opted for Asia, and for years carried out economic promotional activities in major cities of China, India, Japan and other emerging Asian markets. Since information and knowledge are essential to the success of any business, particularly for small and medium sized businesses looking to expand into new foreign markets, we must highlight the work of the headquarters of Casa Asia in Barcelona. The Catalan Government also has a business promotion agency, the ACC10, that has offices in Asia (Hong Kong, Beijing, Shanghai, Singapore and Tokyo) and in Latin America (Buenos Aires, Mexico City, Santiago de Chile and Sao Paulo), whose goals include increasing the number of Catalan companies in international markets and promoting new investments in Catalonia to turn it into a magnet for great value added investments. As part of the Shanghai Expo 2010, for example, the agency organized a seminar entitled “Catalonia, the gateway to Europe” that counted on the participation of fifty Chinese companies. In the same way, within the space devoted to Barcelona in The Expo an economic program to promote the city in different sectors was organized. Barcelona is most definitely not alone in this endeavor. Madrid’s proposals are interesting, and it has also made moves to take advantage of the huge Asian market, particularly in innovation industries. The city is home to the Innova Netwrok, an Ibero-American Summit of Experts in Innovation, Internet and New Business, which aims to turn the city into the center of the world of 202 These forums are held every one or two years; the last took place in 2009 in Chengdu (Sichuan, China), and Barcelona already had hosted it in 2004.


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innovation and technology of Spanish and Portuguese speaking people, bringing together leaders from Europe, the USA and Asia. With this initiative, the city joins Paris, Munich, London and Stockholm as a host of the most important innovation and technology meetings. Moreover, being a privileged contact point between Asia and Europe with Latin America, Madrid became the the Spanish Internet’s capital.202 On the other hand, so, as Barcelona hosted the Global China Business Meeting, the Spanish capital hosted the 2010 Global India Business Meeting, which aims to promote cooperation and business relations. 4.2 Headquartes of Asian and Latin American companies in Spain After the global financial crisis, emerging countries are taking an increasing role in the global economy. To the extent that firms in these countries are expand internationally, Spain must attract subsidiaries and, even, the headquarters of such companies, and has the potential to do so. According to the report Business Footprint: Global Office Locations 2011, carried out by the CB Ricahrd Ellis through the data provided by 280 companies that belong the Fortune Global 500 index, almost 70% of the major multinationals are present in Spain, ranking it in eighth place worldwide behind countries like the USA, UK, France, China and Germany, that occupy the top five places in the ranking.203 By city, Madrid ranks eighth globally, ahead of cities like New York or Paris (and in Europe it’s only behind London and Moscow). If we follow the expansion of Latin American multinationals, Spain has been the entry platform into Europe. Cemex, as we mentioned before, uses Madrid as a center for Europe, the Middle East and Asia. Medium sized companies such as the chain of Peruvian restaurants Astrid y Gastón or Pollo Campero from Guatemala followed the same steps. European multinationals, such as the French telecommunications provider Alcatel, directed their Latin American expansion from their Spanish subsidiaries. This is logical due to the close ties between Spain and Latin America. In addition to being the headquarters of the 202 This has been pointed out by the Economy and Employment Officer of the Municipality of Madrid, Miguel Angel Villanueva, in an interview published in a article on adn.es (June 16, 2009): http://www.adn. es/local/madrid/20090616/NWS-1682-Madrid-Innova-Red-portuguesa-tecnologia.html 203 According to information from Europa Press of September 21, 2011.

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The Role of Cities Iberoamericanan General Secretariat (SEGIB), Spain has numerous organizations like Casa de America to facilitate the situation. It is no coincidence that Latibex, the rate in euros of the Madrid Stock Exchange for Latin American companies, is in that city. The fact that Spain has the experience to serve as a gateway to Latin America and Europe for several international companies, offers it the opportunity to position itself as a corporate hub for Asian companies interested in the double projection towards Spain and the European Union, and to Latin America. That is, one based in Spain could serve as a platform for its natural markets in Latin America. Some of the headquarters itself could find are Asian multinationals that have certain ties and interests with Spanish companies, Asian companies that are expanding in Latin America and looking for a headquarters for their operations, or businesses that combine the two characteristics, expansion to Latin America through agreements with Spanish companies. Some examples were already studied in the business cases in Chapter 2. China Unicom and Citic, for example, now have their regional headquarters for Europe in London. With the agreements that these Asian companies have been forming with Telefonica and BBVA respectively, Madrid, or any other Spanish city, could become more attractive as a venue, especially if these Asian firms have expansion in Latin America among their objectives. There is also the possibilty of seeing Sinopec set up its European headquarters in Spain, given the recent partnership with Repsol YPF to expand into the South American market (other foreign oil companies have their headquarters in Madrid for European operations, as is the case with Mexico’s Pemex). Huawei and ZTE, that already form a commercial bridge in their production alliance as Telefónica suppliers, they could strengthen their presence in Spain through having offices directly located on the peninsula.204 Santiso (2010) also discusses the possible relocation of other businesses that are not included in this study but that could be carried out in the short term. He 204 Huawei’s European headquarters is in London and ZTE’s in Paris. Huawei already has offices in Spain and has a centre of innovation that provides support services in all Spanish speaking countries.


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cites the example of BYD (Build Your Dreams), a world leader in the field of electric batteries and that has signed an agreement with the Spanish group BergĂŠ Automotive for their distribution in Spain. Chery Automobile the Chinese car company also has Berge as a distributor and seeks to expand to Europe and Latin America, considering opening a plant in Catalonia. It also mentions the case of Geely, who bought the Swedish Volvo. In addition to the existence of the conditions for firms with the characteristics of the Chinese companies to establish their regional headquarters in Spain, the said office could also be the basis for an expansion bridge to Latin America, with an important market in terms of the automotive sector and would also be a strong market in the future with the expansion of electric vehicles (as discussed in the previous section). There are already several Asian companies that are opening plants in Latin America (Chinese, Japanese, Korean) and Spain would need to offer better competitive conditions and a better business environment, access to sources of innovation, etc.

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Chapter 5. Areas of Opportunity in the Future One of the characteristics of the financial crisis that erupted in 2008 is that it particularly affected developed countries, among which those of peripheral Europe stand out. It started in the same year in Iceland, and quickly spread to Ireland and ended up affecting Portugal, Italy and Spain two years later. Greece’s public debt represents 127% of GDP.205 Although the Spanish debt problem is not as critical as that of Greece, the economy does not show signs of recovery and the unemployment rates, which is up at around 20%, is the highest in the developed world. Against this background, the business world seeks alternatives for growth and highlights the fact that 50% of the sales and profits of Spanish companies that are members of the Madrid Stock Exchange index come from Latin America, given the investments that the said companies have in the region. This dependence on Latin America will hopefully be these companies’ salvation, and this in turn will hopefully be the engine to help revive Spain’s economic growth. To give an idea of the importance emerging countries are acquiring, it suffices to say that the BRIC economies as a whole could exceed G-7 (the seven richest countries) production in 2032.206 The production of the E7 (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) would already exceed the G-7 by 2020.207 In addition, according to a report by the HSBC208 bank, trade and capital flows between countries of the “South” will be multiplied tenfold in the next 40 years. As discussed in Chapter 1, trade relations and investment between Asia, particularly China, and Latin America have grown “exponentially” in the 205 Data from 2011 with information on: http://www.economist.com/blogs/dailychart/2011/05/europes_economies accessed on July 15, 2011 206 Financial Times (January 17, 2010) also questions whether the recent growth of some emerging powers would result in a change in the global order in the medium term. It is underlined that the BRIC countries have yet to overcome some structural problems such as lack of domestic consumption (China), dependence on raw materials (Brazil) and energy (Russia). Source: http://www.ft.com/cms/s/0/95cea8b6-0399-11dfa601-00144feabdc0.html 207 The term E7 was coined by PricewaterhouseCoopers (PwC) and refers to the group of the seven largest emerging economies. The forecasts of the size of the economy of E7 were released in various media: http://economia.terra.com. ve/noticias/noticia.aspx?idNoticia=201001211258_AFP_125800-TX-IPD87&idtel = 208 The report is entitled: “The Southern Silk Road. Turbocharging South-South Economic Growth”, published in June 2011.


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last couple of years. In this new trade scenario of “South-South”, China has become the largest recipient of exports from Brazil and Chile, and in Peru is the second largest. Meanwhile, a very high percentage of Latin American imports come from China, which is behind only the U.S. in terms of importance. In terms of investment, China’s direct foreign investment in the region has taken off in a spectacular way in the last two years and there have been record transactions in the areas of energy and mining. The Spanish private sector has pioneered expansion in the emerging markets of Latin America, and in Chapters 2 and 3 we examined what the mechanisms were that resulted in this great success and how companies are capitalizing on this expansion in their “natural market”209 to work on their own Asian expansion through the creation of “bridges” between the two continents. The internationalization process of the firms we have presented as our business cases provide important lessons for other Spanish companies looking to expand to other markets. This also allows us to identify other business areas that could be exploited in the future, and so we will be able to offer further recommendations. 5.1 Movement of People: Tourism One way in which Spain can find business opportunities is through cultural and economic exchanges that are derived from the mobility of people. This mobility is a broad concept and can include everything from Asian tourist’s visits to Spain to international migration, and which also includes temporary stays for educational purposes, and the establishment of Asian communities in Spain. One of Spain’s key industries is tourism (as the third/fourth rated country in the world in terms of the highest number of foreign visitors) and the business opportunities that have the potential to expand it further if, in addition to meeting the demands of the growing Asian market that visits Spain, it manages to get travelers that are bound for Latin America to also pass through it. An Natural Markets as defined by Casanova (2002) are those that share language, history and geographical proximity. The expansion into natural markets is easier with a greater understanding of these.

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Areas of Opportunity in the Future example of the growing Asian market is China. During the Spain-China Forum VI held in Barcelona in July 2011, the head of the Ministry of Industry, Tourism and Trade, Miguel Sebastian, stated that this market has the largest potential for growth in the world: in 2009 about 90,000 Chinese tourists visited Spain, 2.9% more than in 2008 (in the last ten years growth has reached 470%)210 and this number is expected to reach 300,000 in 2011 and even one million visitors by 2020.211 Faced with this scenario of increased tourism, cities like Madrid or Barcelona could position themselves as “gateways” to Latin America not only because of the strong cultural ties they have with the region but also due to the quantity of direct flights to Latin America. Although a great many of the flights between Spain and Latin American cities are operated by Spanish and Latin American airlines, there are also Asian airlines that offer Latin America as a destination, and even some that make their connecting flights in Spain.212We have presented one example among our business cases. Singapore Airlines have operated their route between Barcelona and São Paulo since the beginning of 2011 (which is an extension of the route between Singapore and Barcelona)Another example is that of Air China, which began to operate their flight between Beijing and Sao Paulo with connections in Madrid.213 Turkish Airlines announced in October 2011 that it intends to use the Barcelona’s El Prat airport as a link in the running of flights from Istanbul to Latin America. Other Asian airlines flying between Asia and Latin America214 are essentially going to São Paulo: a Japan Airlines’ service from Tokyo to Narita with a flight change in New York, and a Korean Air service from Seoul to Incheon which makes its stopover in Los Angeles. The only direct flight between Asia and South America is made by Emirates on their Dubai service to Sao Paulo. Except for the flight to Brazil, Malaysian Airlines also operates a flight from Kuala Lumpur to Buenos Aires.215 210 Information obtained from a Finanzas.com article of July 5, 2011: “Economy/Tourism – Sebastian travels to Beijing on July 27 to present the China Tourism Plan” 211 Information published in an article on Finanzas.com on July 5, 2011: “Spain aspires to receive one million Chinese tourists by 2020” 212 There are also Latin American companies that fly directly to Asia, such as Aeromexico flights from Mexico City-Shanghai. 213 Since 2010, Air China also has flights connecting Beijing and Shanghai to Sao Paulo with stops in other European cities such as Frankfurt: http://www.airchina.es/es/aboutus/airchinanews/2009/20100120a.html 214 Source:http://noticias.lainformacion.com/economia-negocios-y-finanzas/transporte-aereo/turkish-tiene-voluntadde-usar-barcelona-de-enlace-para-volar-a-latinoamerica_jcwql4gQMfLfBpMrjYoNH3/ 215 Information on flights from Asia to Latin America was obtained from: http://wikitravel.org/en/South_America, accessed August 30, 2011.


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That Barcelona, and other Spanish cities, manage to attract these types of operations is key because they often come accompanied by other types of businesses and investments. As mentioned in the case of Singapore Airlines, it has signed a memorandum of understanding with the Institute of Spanish Tourism, Turespa単a, with the aim of encouraging and promoting tourist arrivals to Spain from Australia, New Zealand, Indonesia, the Philippines and Singapore, destinations where the airline operates. Spain has taken concrete steps to attract Asian tourists. In the case of China it presented, in Beijing in July 2011, a new tourism plan designed to exploit this very market, such as the streamlining of procedures to obtain visas (one of the main problems in travelling to Spain that Chinese tourists currently encounter) and an increase in tourism offices and consulates in the Asian country.216 This type of action that facilitates visits to Spain can contribute to Asian tourists choosing to spend some time in our country, even if their final destination is Latin America. Another of the objectives of attracting Asian tourists is that, in addition to the direct economic benefits, the countries of that region and Spain would get to know each other better on the cultural plane, which surely also strengthens bonds in the long-term, in commercial and investment terms. 5.2 Cultural and Educational Exchanges Given the growth of trade and investment ties between Asia and Latin America, discussed in Chapter 1, there will naturally be more Asian students and employers interested in studying everything from the Spanish language to postgraduate programs, particularly in businesses, that specialize in Latin America217. The growing importance of the Spanish language derives from its scope (as it is a language spoken by over 400 million people in Spain and in, at least, 22 Latin American countries) and the strategic position that Latin America is taking for 216 The plan also includes, among other actions to adapt the Spanish offer to the particularities of Chinese tourism, including the development of guides on Spain in Mandarin, adjusting meal times and the training of bilingual tour guides. 217 Asian students may also be attracted by a variety of reasons such as Spanish-language music, culture, sports, etc..

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Areas of Opportunity in the Future countries like China. The post-graduate programs would aid the development of human resources with expertise in the two regions. Therefore, Spanish institutions must adapt in order to gain through cultural and educational exchanges, particularly bicultural human resources training. The clearest example of support for cultural, educational and linguistic interchanges are carried out by the Cervantes Institute, which has centres and classrooms in the following countries in Asia (including the Middle East): China (Beijing), Japan (Tokyo), Jordan (Amman), Lebanon (Beirut), the Philippines (Manila), Syria (Damascus), Australia (Sydney), India (New Delhi), Indonesia (Jakarta), Malaysia (Kuala Lumpur) and Vietnam (Hanoi). Given that the said institute is originally from Spain and its role in spreading the Spanish language in many of these Asian countries is vital, it would have a role as “bridge” on partly absorbing and as being a showcase for the rest of the Latin American organisations.218 In China, for example, the Cervantes Institute in Beijing is the only accredited centre to represent the cultures in Spanish and, in this sense, Spain is serving as a bridge in the cultural approach that’s taking place between China and Latin America. The study of the Spanish language has soared in Asia. Consider the trend in China. According to data from Otero (2005), there were some 16 institutions of higher education that taught Spanish in 2003 (against 12 in 1999), and 1597 undergraduate students of Spanish philology (against 79 in 1999). In mid 2008, China already had more than 40 institutions of higher education teaching Spanish and seven secondary schools, according to estimates from the Ministry of Education of the Spanish Embassy in Beijing.219 The same Cervantes Institute in Beijing, for example, receives 50% more enrolment each year (it ended the 2010 academic year with about 4,000 open enrolments), and plans as one of its objectives to have a space for creation and the training of these bilingual experts (in both directions) carrying out synergies with companies in the two regions.220 The Spanish language has become a major calling card of many business projects Although institutions such as Colegio de Mexico have signed agreements with Chinese universities, these centres are not accredited to represent cultures in Spanish. 219 Data released by The Digital Broadcaster in an article, March 28, 2009. 220 According to Inma Gonzalez Puy, director of the Instituto Cervantes in Beijing, in an interview with the Latin American Observatory of Asia-Pacific in March 2011. 218


Chapter 5 Areas of Opportunity in the Future

in China. Banco Santander, for example, is promoting the Cervantes Institute with the creation of a program to teach Spanish online to students at the elite Tsinghua University.221 Although institutions that teach Spanish in China have multiplied, Spain has yet to attract Chinese students who leave their country to study abroad. While China has become the country with the highest number of students studying abroad in the world (1.27 million in late 2010)222, Spain and Latin America are still largely irrelevant in the process of attracting these students, as the preferred destinations are: USA, Australia, Japan, UK, South Korea, Canada, Singapore, France, Germany and Russia. In 2010, 400,000 young Chinese people travelled to a foreign country to complete their training, of which 5,000 come to Spain, which is to say, 2% of Chinese international post-graduate students from around the world.223 One area in which Spanish institutions can begin to show their competitiveness and attract Asian students is in the business schools. Since Latin America has historically been the natural market for Spain, Spanish academic institutions and business schools offer programs with a competitive advantage and great added value. Indeed, one motivation to study in Spanish institutions is the closeness to Latin America they can provide (in terms of language, culture and business). It was found that most students are between 18 and 23 years old and learn Spanish to get a student visa so as to travel to Spain, where they study a Master’s, then return to China, and then later leave to work in Latin America with Chinese companies224. It is so that some schools try to win over students in China so as they go to Spain to continue their training. This is the case of the Higher Institute of Training and Business (ISFE), based in Burgos. In business schools, executive education programs may be particularly successful through which the Spanish academic institutions can provide training in business models and tools and also pass on their business experiences with Latin America, Information from Digital Exporter: http://www.el-exportador.com/032009/digital/mercados_china.asp Information obtained from ADN in an article published on April 15, 2011: http://www.adn.es/internacional/20110415/NWS-0155-China-estudiantes-extranjero-pais.html 223 According to an article published in La Vanguardia on September 28, 2010 224 Review by Manolo Fernandez, director of studies at the Instituto Cervantes in Beijing, for the EFE agency. 221 222

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Areas of Opportunity in the Future perhaps through specific case studies. For example, the Public University of Navarra has a Master’s program in International Trade which is organized jointly with the University of Foreign Studies Guangdong (China) and whose purpose is precisely to create a bridge between Asia and Latin America. The Pompeu Fabra University/idEC opened a new Master’s program in International Business with a specialization in Latin America and Asia in October 2011 (it’s an international degree with a title in English: “Master’s in International Business. Specialization in Business with Latin America, Europe and Asia”)225. The program will obtain official recognition and be part of the new business school of the University: the Barcelona School of Management. On the other hand, at the end of this work we’ll present an important and unprecedented program that greatly enhances the role of the city of Barcelona as an academic bridge between Asia and Latin America and that is a good example of public-private cooperation. It concerns the Ortelius program, led by the Autonomous University of Barcelona (UAB) and sponsored by Banco Santander, which will promote the mobility of students from Asia and Latin America through double and multiple degrees in a network of 32 universities that make up about 900,000 students. The network joins the UAB with 18 Asian universities (eleven Chinese and seven South-Korean) and 13 Latin American countries (Argentina four, four Brazilian, two Mexican, and one from Colombia, Costa Rica and Paraguay). The program will be implemented in the 2012-2013 course and will offer a wide range of scholarships.226 Another business school, ESADE, has joined the Global Business School Network, made up of over 40 business schools in 25 countries around the world to train entrepreneurs in emerging economies. As part of this network, businessmen in emerging Asian countries could be trained to work in companies located in Latin America (and vice-versa). This step is consistent with the strategy announced by ESADE,227 in which the increased activity in Spain will be accompanied by a higher level of international operations, focusing, mainly, 225 The university website provides a description of the program: http://www.idec.upf.edu/master-in-internationalbusiness-specialization-in-business-whith-latin-america-europe-and-asia 226 This news was broadcast in major Spanish newspapers on November 17, 2011. You can find more details at: http:// www.abc.es/agencias/noticia.asp?noticia=1003517 227 Eugenia Bieto, general manager of this business school, announced plans for the institution in an interview published by Expansión.com on September 5, 2010.


Chapter 5 Areas of Opportunity in the Future

on Europe, Latin America and Asia. Their two big bets will be on India and Brazil, where the school hopes to have physical presence (if not through a campus, at least one office of representation). A headquarters based in Brazil would allow, along with the centre it already has in Buenos Aires, the formation of a platform to further expand its network in Latin America. In India, ESADE hopes to establish a research centre, that could expand with training programs offered in partnership with other academic institutions. There are other examples that go beyond business. The Universities of Malaga and Sevilla have formed a new program in Asian studies, on which they’ll seek to train experts in cultural, social, economic and tourism related brokerage, with South Korea, China and Japan. The academic degree arose with the aim of training experts in relations between the Asian continent and Hispanic organisations, and its main objective is to create mediators capable of acting as a bridge between Asia, Spain and Latin America, that is, facilitators of the business relations and institutions of both cultures228. The Public University of Navarra has signed agreements to collaborate with Chinese and Latin American centres whose primary objectives are to strengthen relations with the faculty. Spanish universities are aware of the potential and have adopted promotion and internationalization strategies. There are several examples. Business schools, Spanish public and private Universities and publishers approach Chinese students through events such as the China Education Expo or “Spanish Week” organized by the Spanish Embassy in Beijing, the University of Foreign Studies Beijing (UEEB), and the EFE News Agency. A public universities group in Cantabria, Castilla-La Mancha, Extremadura, La Rioja, Navarra Public University, Oviedo, the Basque Country, Zaragoza and the Balearic Islands (called G9 and that are public Universities unique to their respective regions) have also agreed to promote their degrees and postgraduate courses in international fairs in Asia and Latin America.229 228 These are specifically the objectives set by the Dean of Social and Labour Studies, Francisco Manuel Montalbán, in an article in the local newspaper: Málaga Hoy (dated May 8, 2011). 229 Source: http://www.que.es/badajoz/201012011954-universidades-promocionarangrados-postgrados-ferias-epi.html

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Areas of Opportunity in the Future Apart from China, India is another country which is seeking a greater educational exchange, and is of great importance in terms of sending international students out into the world: during the 2009-2010 academic year there were more than 104,000 Indian degree students who decided to pursue university studies abroad.230 The city of Delhi, for example, in early 2010 hosted the first Spanish Universities fair in India (at the Cervantes Institute).231 A group of Spanish universities called the “Alliance of Four Universities’ (A-4U, born in 2008 with the objective of encouraging mobility of teachers), comprising of the Pompeu Fabra University, that of Carlos III of Madrid and the Autonomous Universities of Barcelona and Madrid, have also signed a memorandum of understanding with Indian centres of higher education to foster the exchange of students, teachers and researchers between the two countries. The aim is to initiate cooperation in the areas of engineering, technology, bio-sciences, economic science and the humanities.232 These agreements will enable Indian undergraduate and post-graduate students to complete their training in several Spanish universities for between six months to a year, and vice versa (Spanish students could also finish their studies there), in addition to facilitating collaborative research projects between specialists from both countries. Spanish universities could offer within their competitive advantages training that serves as an entry into to the business of the Latin American market. 5.3 Renewable Energy Facing the phenomenon of global warming, much of the efforts to reduce greenhouse gas emissions are concentrated in the energy sector.233 The options for mitigating these gases are classified into two main strategies: in the more efficient use of energy, commonly accompanied by new technologies, and energy production from the utilization of renewable sources like solar energy, wind Information from an article from Europa Press December 2010. The event has been dubbed ‘First Spanish Universities Fair’ 232 The announcement of the agreement was published in a article on Ideal.es on November 24, 2010. Participating institutions in India are the Indian Institute of Foreign Trade, Birla Management Technology, the International Institute of Information Technology, Jaypee Instituteand of the sciences Bangalore (South). 233 There are other sectors such as waste and waste management, agriculture anddeforestation are also relevant to the issue of global warming. 230 231


Chapter 5 Areas of Opportunity in the Future

power, hydraulic/water/wave power and bio-energy. In addition, the March 2011 Fukushima nuclear power tragedy in Japan has meant that the search for alternative sources of energy has been more topical than ever This is an area where Spain can magnify its business potential by counting on an important position in the world of renewable energy, being in the top positions in sectors such as wind power energy (though Spain is in fourth place, the Spanish company Iberdrola is the world leader in the generation of this type of energy), and having close ties with Latin America that allow it to create bridges with Asia, these two continents being the current driving force for renewable energy in the world. According to the report Global Trends in Renewable Energy Investment 2011234, in 2010 developing countries for the first time surpassed the developed in terms of new financial investments in renewable energy projects of relevance and the providision of capital for renewable energy companies. Asia, led by China, and Latin America are the motor driving such investments. According to a report by Pew Charitable Trusts and Bloomberg, China invested about 54,400 million dollars in clean energy and low carbon technology in 2010 (39% more than in 2009), representing a fifth of the global total and maintaining the Asian giant as the world’s leading investor in these energies (Germany and the US are second and third).235Latin America, for its part, invested 13,100 million dollars in the renewable energy sector in 2010, up 39% on the previous year, making the region as a whole the second largest investor in renewable energy after China.236 Brazil is ranked number 6 in the world, with an investment of 7,600 million, 81% more than in 2009. Mexico is situated in the 14th position, with 2,300 million and an increase of 74%. Then come Chile (960 million), Argentina (740 million) and Peru (480 million). For reference, Spain is in 8th place, with 4,900 million dollars and an increase of 55%.

234 This report was prepared by the Frankfurt School of Finance and Management, United Nations Environment Program (UNEP) and Bloomberg New Energy Finance 235 This is not surprising, since China has already become the top consumer of energy in the world (over the USA). So much so that in 2005 China passed a Renewable Energy Law and is now the world’s leading producer of solar energy equipment and wind turbines. 236 Information from Spanish.China.org.cn: “China and Latin America, the largest investors inrenewable energy” (July 8, 2011)

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Areas of Opportunity in the Future Although investment in renewable energy experienced a downturn during the global financial crisis, the drop was smaller than had been expected.237 The largest decreases were recorded in large solar power plants and in bio-fuels, while investment in wind-farms hit record highs, thanks to new Chinese wind-farm installations (making China the world leader in this type of energy) and windfarm complexes in the North Sea. Among the Chinese investments, 72% went to the wind power sector, 6.3% to solar energy, 3.8% on bio-fuels, 0.3% on low-carbon technology and 17,5% for other renewable energies. Latin American investment in renewable energy has been focused primarily on wind power, geothermal, and biomass and ethanol plants. In 2010, Spanish companies made significant progress in clean energy in Asia. Acciona and Gamesa, for example, expanded in India238, the first through the construction of its third wind-farm239 and the second in launching the manufacture of wind turbines for wind power generation. Acciona, in 2009, also signed a strategic alliance with Japan’s Mitsubishi Corporation to invest up to 2,000 million euros in the development of renewable energy projects worldwide. Many other investments and agreements have taken place in China. Gamesa began building its fifth production facility in China240 in the province of Jilin and announced an investment of 90 million euros in this country, running till 2012, with the installation of new wind farms. In the area of solar energy, Affirma Engineering and Technology became the first Spanish company to develop a solar project in China by providing technology for the largest photovoltaic plant in the country, located in the city of Xuzhou. Given the importance of Asia and Latin America in terms of renewable energy, Spain also has, in addition, the potential to expand its business in the two regions through the creation of business that links them. The particular case of bio237 According to data presented in an article on Finanzas.com on July 15, 2010 (which were obtained from UNEP), global investment in clean energy fell 7% in 2009. 238 Spain and India signed an agreement on renewable energy in 2009. 239 The park entered into service in 2011, rising in the State of Karnataka with 34 wind turbines. 240 In October 2010, the subsidiary Gamesa Wind Tianjin signed new contracts with threeChinese companies to supply 197 wind turbines.


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energy (renewable energy obtained from biological materials)241 is an interesting example in terms of triangulation because, while Spain is one of the three largest producers of bio-energy in Europe, Brazil has long been a pioneer in using the energy contained in sugar cane to produce ethanol (the South American giant is the world’s second largest producer and leading exporter of this bio-fuel) and China has recently adopted a policy of blending ethanol with gasoline to reduce gas emissions, but it cannot meet demand alone.242 Petrobras announced that in 2011 it would enter into agreements with PetroChina to evaluate the possibility of jointly producing ethanol in Brazil to later export it to the Asian giant. Spain should seek to play a role in the trading of these types of energies. It could join forces with Brazil and China in the bioenergy sector, as Spain already has the experience of acting as a “bridge” between regions in the said sector. For example, in 2010 the then Brazilian president Lula da Silva launched a search for new Spanish allies for its massive surplus of ethanol. It was given to know that Brazil wanted to make a bridge of the Canary Islands for production in Senegal and Angola and to reach the European market without barriers. It was also announced that Brasilinvest would install an operations hub in Valencia from which to distribute bio-fuels to the EU. This means that, in addition to Spain being the Europe’s fourth highest Ethanol consuming country and the second in terms of production243, it already counts on having experience as a “gateway” or “bridge” of Brazilian production on other continents (Europe and Africa).244 This could make Spain again attractive to China, that seeks greater access to sources of energy production in Brazil and Latin America. 241 In its strictest sense, bioeneryg is synonymous with biofuel, fuel derived from biological sources. Ethanol is one of these fuels. The country that’s the world leader in ethanol production is the United States, followed by Brazil, but here the energy is obtained from corn, while in Brazil it is produced from sugar cane. The largest producer of sugar and ethanol in Brazil is the companyCosan. Other sources of fuel are wood, wood waste, straw and manure. The largest biodiesel plant in the world was just opened, in Singapore in 2011, by the Finnish state-owned oil company Neste Oil. 242 Information obtained from an article in the Latin American Herald Tribune, published onJuly 20, 2011: http:// www.laht.com/article.asp?CategoryId=13280&ArticleId=349352 243 Information obtained from Biofuels barometer - EurObserv’ER in: http://www.energiesrenouvelables.org/ 244 Information obtained from a article of March 17, 2010 by NextFuel, news and information portal for biodiesel and renewable energy: http://biodiesel.com.ar/2482/biocombustibles-lula-dasilva-busca-aliados-en-espana-para-etanol-ybiodiesel. The article explains that the Canary Islands would be a platform not only for Brazilian investments, above all in energy, in Africa – which has started to become its second field of global biofuels production - but as a battering ram to penetrate, with Brazilian products (including those generated by companies on African soil by carioca companies) finally “without obstacles” from the Canary Islands Special Zone (ZEC) to the European market, at least the Iberian. The Spanish Economics Ministry itself says it will be, in less than a decade, the “breadbasket of biodiesel in Europe”, with the production of over 600 million litres per year.

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Areas of Opportunity in the Future Likewise, the new Petrobras, with Galp (Portuguese energy company), plan to produce ethanol in Portugal also involves Spain: the Brazilian company wanted to designate up to 30% of the production of the new factory for consumption by Spain. This project is Petrobas’ first step in direct production in Southern Europe.245 Spain also participates in scientific cooperation agreements with Latin America. Through the Iberoeka program, for example, that seeks to make innovations in the energy field, such as producing ethanol from the straw left as a residue in the sugar cane plantations.246 Argentina is another of the Latin America countries with potential for growth in the biodiesel market, like ethanol, it’s a bio-fuel derived from biomass. Although it’s only been producing biodiesel since 2007, production has increased by 200% in just three years. Here the opportunity for Spain is to facilitate increasing closeness between the Argentine biodiesel producers and large markets like China that, with 24% of its vehicles using biodiesel, by 2015 would require more than 12 million tons of bio-fuel.247 A possible approach through Spain could be viable as it’s known that the trade relationship between China and Argentina has been tense in the last couple of years due to trade frictions. Spain knows the trade in this sector well as it is already the principal market for Argentine biofuel exports. Finally, apart from the expansion in renewable energy production, Spain also has potential in the area of innovation for a more efficient use of energy. Emerging countries are interested in consuming less energy. China, for example, has announced it will close 2000 obsolete factories to save energy and reduce emissions.248 Countries are also innovating in order to consume cleaner energy, and the transport sector is key to that. Ethanol production has doubled since 2002, thanks to the development of flexible fuel vehicles (that is, they can run on either gasoline or ethanol). It is estimated that in Brazil, for example, 90% of vehicles will utilize ethanol by 2017.249 Electric vehicles are also gaining ground. 245 I nformation from NextFuel, article of June 3, 2010: http://biodiesel.com.ar/3633/argentina-y-brasil-intentan-apretar-la-pinza-del-mercado-deespana-para-poder-continuar-con-la-revolucion-verde-de-sus-biocarburantes 246 In fact this information was obtained from a Chinese news centre, which shows part of that country’s interest in these issues. Source: http://spanish.news.cn/tec/2009-08/04/c_1320284.htm 247 Information obtained from NextFuel on its website. 248 Information released by China Daily in an article of August 9, 2010. 249 This information is based on a special article about ethanol published by The Economist on September 2, 2010.


Chapter 5 Areas of Opportunity in the Future

Spanish companies, among which Endesa stands out, have been involved in various aspects of the electric vehicle industry, and some of the businesses was done in triangulation with Asian and Latin American companies. Chilectra (Chilean subsidiary of Enersis, controlled by the Spanish Endesa)250, together with Japan’s Nissan Marubeni and Brazil’s Petrobras, inaugurated Chile’s first rapid charge “electro-station” for electric cars in Latin America in 2011 (at a Petrobras service station). Endesa has also reached agreements with Mitsubishi (involved in the automotive field) to study the possible implementation of electric vehicles in Europe and Latin America. In fact, these two companies were to also lead a consortium that took place in the Spanish city of Malaga, the ZEM4ALL project (Zero Emissions Mobility for All)251, a 60 million euro project that displayed the new services in massive form, and the benefits of electric mobility in cities.252 It is perhaps based on this experience that the Chinese company Beiqi Foton set its sights on Spain for the manufacture electric buses, which could potentially be exported to other regions like Latin America. There are other areas in the electric vehicle industry where Spain could also make advances. For example, interest in the industrialization of lithium, which is essential in the manufacture of batteries for the electronics and automotive industry, has shot up. Bolivia has largest reserves in the world and Argentina and Chile also have significant reserves. On their part, Asian firms and governments have approached these countries to utilize and industrialize the mineral, and there are already Asian companies making investments. Bolivia plans to export lithium carbonate to Japan, China and South Korea, and will be seeking associates for the provision of the necessary technology in the manufacture of batteries. Japan, with its strong car companies, is a potential partner to develop the lithium reserves and has made efforts to offer their cooperation through companies such as Mitsubishi.253 The companies Korea Resources Corporation (Kores) and China’s Citic Guoan have also submitted plans to industrially produce lithium, not only in Bolivia but also in Argentina Endesa is the largest private electricity company in Latin America. Other Spanish companies are also involved, such as Telefónica and Sadiel. 252 Information obtained from an article published on Finanzas.com on March 28, 2011. 253 Japan organized in La Paz in February 2011 the seminar : “Strategic Sector Development in Bolivia”, with the participation of a mission of 40 officials, businessmen and Japanese scientists. 250 251

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Areas of Opportunity in the Future (where Mitsubishi has already entered too) and Chile. It’s time that Spanish companies also got involved in this growing market. 5.4 Infrastructure and construction Latina America is the region with the highest expectations for the growth of infrastructure investment over the next few years.254 Like other emerging areas of the world, the region has considerable shortcomings, a fact which has caused large Spanish companies of the sector to take part in major projects. For the Inter-American Development Bank, the region must invest 9% of its GDP in infrastructure to compete with other developing regions, especially Asia, compared to the 2% that is on average currently invested.255 According to the Multilateral Investment Fund of the body, basic infrastructure and transportation are the most promising sectors for projects of public-private participation in Latin America and the Caribbean.256 According to a Bank of America Merrill Lynch report in 2010,257 the governments of emerging countries have pledged 6.3 billion dollars for their infrastructure and much of the sum will be invested in improving water systems, in energy and transport, attempting also to let private firms have a greater role. Specifically on Latin America, as part of the XXI Latin American Summit and the Second Southern Cone Infrastructure Summit, held in October 2011, it was noted that to maintain its expansion the region needs medium and long term investment in infrastructure of amounts ranging from 250,000 to 450,000 million dollars.258 According to the 2010 ranking of the world’s largest contractors prepared by ENR, China has five firms in the top ten places as measured by total revenues, 254 According to an article in Expansion on the world’s largest construction firms published September 8, 2010: http:// www.expansion.com/2010/09/07/empresas/inmobiliario/1283812003.html 255 According to a The Economist article of November 17, 2011. http://eleconomista.com.mx/industrias/2011/11/17/ mexico-debe-invertir-9-pib-infraestructura 256 According to an IDB article, November 9, 2011. http://www.iadb.org/es/noticias/anuncios/2011-11-08/9674.html 257 Report released by CNN Expansion on October 12, 2010. http://www.cnnexpansion.com/economia/2010/10/11/ emergentes-apuestan-en-infraestructura. 258 According to an Article in Capital Madrid November 3, 2011. http://www.capitalmadrid.com/2011/11/3/0000023127/latinoamerica_sin_infraestructuras_no_hay_paraiso.html


Chapter 5 Areas of Opportunity in the Future

including the top two positions, China Railway Construction Corporation (CRCC) and China Railway Group, which displaced the French Vinci. However, measured by international sales, European companies continue to dominate the top ten, that includes no Asian firm and has only two Americans. In this category, Hochtief, the German construction group controlled by the Spanish ACS, leads the list of firms with the most international business. The Spanish FCC stands out (11th place), Grupo ACS (18th), Technical Reunidas (29th), Ferrovial SA (34th), Abengoa (39th), Isolux Corsan SA (56th), Iberdrola Engineering and Construction (59th), Sacyr Vallehermoso (64th) and Acciona (70th).259 It is evident that the relevance of Chinese firms comes from the growth of the same country (in 2008 China launched an infrastructure plan for about 586,000 million dollars to which foreign companies have had almost no access),260 but their financial capacity and experience have contributed to a successful international expansion based on competitive prices. This expansion has been mainly in Asia and Africa, but has also begun in Latin America. China’s interest in Latin America, infrastructure agreements with the IDB A report by the Chinese Academy of Social Sciences, 2009, points out that new opportunities are opening up for Chinese companies in Latin America, noting that the construction of infrastructure in the region is booming and that the Chinese contractors with engineering projects are being successful.261 The sovereign wealth fund China Investment Corporation, which manages 300,000 million dollars, said in March 2011 that it sees great potential for trade and investment in Latin America and that it is ready to increase its investment in the region because it trusts in its growth prospects, though without specifying sectors.262

Expansion article cited. Ibid. According to a CRI article of March 3, 2009. 262 According to an article by Reuters, March 30, 2011: http://lta.reuters.com/article/businessNews/idLTASIE72T07X20110330? 259 260 261

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Areas of Opportunity in the Future Particularly on infrastructure, the Export-Import Bank of China (China Eximbank) announced in April 2011 that it would present before the end of the year a yuan-denominated sovereign fund of 1,000 million dollars to invest in Latin America, mainly in infrastructure construction in collaboration with the Inter-American Development Bank.263 In this context, the Chinese Academy of Social Sciences said that urbanization is a common issue between China and Latin American countries, and that opportunities for cooperation will increase as they accelerate the construction of their infrastructure. Both banks signed in March 2011 a letter of intentions to boost trade and investment activities between Latin American countries and China, under which it agreed to establish an infrastructure investment mechanism to finance public and private sector projects. They also signed a memorandum of understanding to establish an investment fund to build sustainable economic partnerships between China and Latin America. Initially, it is planned that the fund will be invested, above all, in infrastructure projects, energy and natural resources.264 In relation to the collaboration of the IDB with China, it’s fitting to note that in September 2011 the Segmental Bridge was inaugurated in Ecuador, which was the first project financed by the bank and built by a Chinese company. The bridge, the longest in Ecuador, was built by the company Gaunxi Road & Bridge Engineering Corporation and represented an investment of $101 million from the IDB. The organisation’s president, Luis Alberto Moreno, said that “the bridge symbolizes the increasingly close ties between China and Latin America and the Caribbean.”265 Chinese Projects in Latin America In a context of increased Chinese investment presence in the region and in general of increasing South-South investment, as explained in Chapter 1, the Asian giant is beginning to develop and finance large infrastructure and works in 263 According to a China Daily article of April 29, 2011: http://www.chinadaily.com.cn/bizchina/2011-04/29/content_12418633.htm 264 According to an IDB article, March 28, 2011. 265 According to an IDB article, September 26, 2011.


Chapter 5 Areas of Opportunity in the Future

several Latin American countries. Among the major projects recently announced, we highlight several hydroelectric plants in Ecuador266 and Honduras, railways in Argentina267 and Brazil, infrastructure and electrical generation in Brazil and Venezuela;268 agricultural investments in the millions in Argentina and Brazil that include infrastructure, and mining infrastructure in Peru and Venezuela . We also highlight a project that demonstrates the great interest aroused by Latin American raw materials and the consequent development of appropriate infrastructure for their export to Asia. Colombian President Juan Manuel Santos said in February 2011 that China and Colombia were engaged in advanced discussions to build a railway connection between the Atlantic and the Pacific in the South American country, as an alternative to the Panama Canal. Santos said that it concerned a real proposal and that the cost studies conducted by China made it viable. The railway line, 220 miles long, would link the Pacific to a new city near Cartagena in northern Colombia, which would serve as an assembly base for Chinese goods destined to be re-exported to the entire American continent. The line will also be used to export Colombian raw materials to China.269 We mustn’t also fail to mention the Açu Superport or “Highway to China,” a port to be located in Rio de Janeiro and that will be the largest port in the Western Hemisphere when completed. This concerns the most ambitious project of millionaire Eike Batista’s business (the port is looking to attract a total investment of 40,000 million dollars) and one of the first Brazilian infrastructure projects built on a comparable scale with any of the Asian giant’s works. The work is in the hands of LLX, the Batista logistics company and among its 266 The biggest of the dams that China has financed and built in Ecuador is Coca Codo Sinclair, to be financed with a loan from the China Eximbank of 1,700 million dollars agreed in 2010 and built by Sinohydro. 267 According to an article by Reuters, July 14, 2010, during the visit of President Fernandez to China it was agreed that this country will finance the renovation of the Argentine railway system, a project that will require a total of $ 10,000 million and also includes a subway construction project in the city of Cordoba. 268 According to an in Xinhuade September 2, 2010, the Ministry of Planning and Finance of Venezuela reported that China will invest 5.549 million dollars to strengthen the National Electrical System of the South American country. These resources correspond to the first phase of the financing agreement for 10,000 million dollars awarded to Venezuela bu China, to be implemented between 2010 and 2012. 269 Statements of the Financial Times in an interview published on February 13, 2011 under the title “China in talks over Panama Canal rival.” The article adds that this project would be just one of a series of proposals for China to strengthen transport links with Asia and improve infrastructure in Colombia. There would also be advanced talks over a 791 km rail line and the expansion of the port of Buenaventura on the Pacific. The project, worth 7,600 million dollars,would be financed by the China Development Bank and operated by China Railway Group. It would be capable of carrying up to 40 million tons per year, with emphasis on coal for China. Colombia is the fifth largest producer of this mineral in the world.

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Areas of Opportunity in the Future associates are China’s Wuhan Iron and Steel and South Korea’s Hyundai Heavy Industries. After initiating operations in 2012, it will be deep enough to receive the Chinamax, the new vessel capable of transporting 400,000 tons of iron ore between Brazil and China (twice the capacity of most of the ships that currently sail the route).270 In regards to general investments in infrastructure it’s fitting to be underlined that the presidents of Brazil and China, meeting in April 2011 in the Asian country, stressed the high potential for cooperation in infrastructures, particularly in the Growth Acceleration Program’s projects in transportation and energy, and announced the investment of Chinese enterprises in the areas of sporting events taking place in Brazil, the World Cup in 2014 and the 2016 Olympic Games.271 It is also worth mentioning that China seeks to increase its financial presence in the Caribbean countries: during the Third Chinese-Caribbean Economic and Commercial Cooperation Forum, in Trinidad and Tobago in September 2011, it was announced that China will provide 1,000 million U.S. dollars in preferential loans to finance infrastructure projects in various Caribbean countries.272 Not only China ... Other Asia Pacific countries have also seen the great potential of Latin American infrastructure. In recent years, some major investments and cooperation agreements stand out in countries such as Singapore, South Korea and Australia. Already in 2008, the Singaporean sovereign wealth fund Temasek Holdings had appointed representatives in Brazil and Mexico with the aim of increasing their investments in Latin America, considering it to be one of the regions with the highest prospects for growth.273 In July 2010, Temasek announced an agreement with Impulsora Mexicana Real Estate Development (IMDI) to form a joint business worth $200 million that would be seeking business opportunities in Financial Times article of May 9, 2011 entitled “Superport is Brazil’s new route to China.” According to an Iberoasia article of April 13, 2011: http://www.iberoasia.org/blog/?p=9025 According to an Infolatam article of September 12, 2011. 273 According to an EFE article of May 28, 2008 published by Terra: http://terranoticias.terra.es/nacional/articulo/compania_temasek_latinoamerica_2505106.htm 270 271

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affordable housing in Mexico.274 A few months later, the fund would invest $400 million in Brazil’s Odebrecht Oil and Gas, which would use the funds for new investments and to consolidate itself as an integrated service company for the oil industry.275 For its part, South Korea agreed to cooperate on infrastructure materials, housing and urban development with Colombia, and also in energy development and mining in the South American country.276 Similarly, Korea and Panama agreed to strengthen cooperation in infrastructure and natural resources during a presidential visit focused on a presentation on the amplification of the Panama Canal.277 Korea will collaborate with Honduras in the development of “model cities” to be implemented in the Central American country following the experience of the city of Songdo.278 Equally important is the investment of $150 million by Hyundai Heavy Industries for the construction of a heavy machine factory in Rio de Janeiro, which will be its first plant outside of Asia. Rio was chosen due to the large investments in infrastructure that the region will receive through the previously mentioned sporting events of 2014 and 2016.279 Australia also has a presence in the region, highlighting hydroelectric projects in Chile. In 2009 the company Pacific Hydro began work on a hydroelectric plant with an investment totalling more than 450 million dollars. The Chacayes centre was opened in October 2011, at which time the Australian company expressed the desire to develop projects in the same zone as the centre that would involve an investment of 2,000 million dollars.280 274 According to a Bloomberg article of July 28, 2010: http://www.bloomberg.com/news/2010-07-28/temasekimdi-form-200-million-venture-toinvest-in-real-estate-in-mexico.html 275 According to an article by America Economia October 20, 2010: http://www.americaeconomia.com/negociosindustrias/temasek-de-singapur-invierte-us400men-brasilena-odebrecht 276 Agreements reached during the visit of President Juan Manuel Santos to South Korea in September 2011. It was the first visit by a Colombian head of state to the Asian country. Iberoasia article of September 15, 2011: http:// www.iberoasia.org/blog/?p=11017 277 Cooperation agreed in October 2010 during which he was the first visit by a Panamanian president to South Korea since the two countries established diplomatic relations in 1962. Lee Myung-bak called on Ricardo Martinelli’s collaboration for South Korean companies to take part in mining projects in developing networks of rail and urban transport, and the construction of dams. Iberoasia article of October 20, 2010: http://www.iberoasia.org/blog/?p=7100 278 Collaboration agreed during the visit to Korea by President Porfirio Lobos in February 2011. Article from America Economia, 279 According to an Iberoasia article of July 6, 2011: http://www.iberoasia.org/blog/?p=10222 280 According to Pacific Hydro article of October 25, 2011. http://pacifichydro.cl/2011/10/25/ministro-de-energia-inaugura-central-hidroelectrica-depasada-chacayes-en-elvalle-del-alto-cachapoal/?language=es

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Areas of Opportunity in the Future Spain as an Asia-Latin American Bridge Although large Chinese infrastructure and construction firms pose direct competition to Spanish companies by their prices and financial capacity, not only in America but in all markets, by which the first mentioned country gains international terrain that will then necessitate the seeking of alliances based on factors such as experience and the Spanish presence in the region, as we see they are factors valued by the construction companies of the Asian giant. Moreover, the liquidity of China’s economy in times of a shortage of funds in the developed world makes it possible for Spanish companies to seek financing from the Asian country to develop large projects in Latin America, as we will see in one of the cases explained below. Another element in favour of the Spanish firms is that many of them have an advanced presence in Asia Pacific and therefore are not someone simply unknown to Asian markets and companies with which they could associate in Latin America. Just to mention some recent examples, we note that Acciona has developed three wind-farms in India and will participate in the construction of a tunnel in Australia, on a project valued at 1,100 million euros. Similarly, Isolux Corsan will build and operate electric power lines in India for an amount in the region of 815 million euros, and has been awarded the contracts for several highways in the country. On their parts, TCB and OHL were awarded the construction and subsequent management of the future terminal container at the Ennore port in India, Villar Mir is to invest 560 million euros in four hydroelectric plants in China and the group Underground Works (OSSA) will participate in the construction of a metro tunnel in Hong Kong.281 Perhaps the most remarkable case in terms of potential for Hispano-Chinese collaboration in Latin America is the strategic alliance that was brought to a close in March 2010 by the construction company from Burgos Arranz Acinas with three large Chinese state-owned companies specialized in the supply of materials and large public works: Catic Beijing , China Railway Electrification 281

The information on these projects is in Iberoasia: http://www.iberoasia.org/blog


Chapter 5 Areas of Opportunity in the Future

Bureau and CCCC Second Highway Engineering. Jesus Arranz, Director of the group, stated that the group’s knowledge of the Latin American market would be of particular interest to Chinese companies, “because, from a technical point of view, we can coordinate and manage the joint ventures established to build there.”282 Upon the announcement of the alliance, the press particularly underlined the fact that Acinas Arranz had overcome the fears large Spanish groups have when faced with Chinese companies, going so far as to say that the consortium “marks a milestone in the national construction sector that could be the catalyst for new alliances between Spanish and Asians companies.”283 The primary objective of the consortium was the construction of the new Panama metro system (a country where Arranz Acinas is one of the largest construction firms), a work worth around 1,000 million euros that was eventually awarded to the Spanish FCC in partnership with the Brazilian Odebrecht and the French Alstom.284 In the medium term, the consortium seeks to participate in the major works competitions that are tendered in Eastern Europe and Latin America. Of this region, Arranz Acinas said that Colombia will be the next step.285 In terms of the funding of the Asian giant, in October 2010 it was agreed that the Bank of China and the Bank for Foreign Trade of China would earmark $462 million for the conlcusion of the first stage of a tourist resort, a luxury real estate project led by Spanish investors in the Dominican Republic. This first phase of the project, called Punta Perla, will conclude in early 2013, and the agreement provides for the possibility of China’s investment in the other three stages of the project, planned for a period of eight to ten years. The deal marks China’s first investment in the Caribbean country.286

According to Diario de Burgos article of March 19, 2010. Article from Expansion, March 16, 2010. It also mentions that ACS is attempting to formalize its relationship with China’s Citic Construction, among other things, to come together to compete in Latin America, Africa and Asia, but has not made a yet been able to close an agreement. http://www.expansion.com/2010/03/15/empresas/ construccion/1268688941.html 284 Participating in this bidding was another Latin American-Asian consortium: Acciona was present along with with the CAF Spanish, Japanese Mitsubishi and Mexico’s ICA. 285 According an Iberoasia article of March 17, 2010 which includes several sources: http://www.iberoasia.org/blog/?p=4461 286 According to articles from Finance October 15, 2010. http://www.finanzas.com/noticias/economia/2010-10-15/363011_china-financiara-proyectoturistico-espanol.html 282 283

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Chapter 6. Recommendations It has been called the new millennium of the emerging economies. Their rise has intensified with the arrival of each crisis: the so-called subprime (U.S. “junk” mortgages) of July 2007, the fall of Lehman Brothers in September 2008 and the current European crisis. On each of these occasions and ever more forcefully they have been invoked as sources of funding to save the west from crisis. In the new scenario of the world economic order that’s emerging, it is expected that emerging countries as a whole will come to represent up to 70% of global growth in the coming years. This time the epicentre of the global economic crisis has been situated in Europe and United States and particularly affects developed countries. The strong link between Spain and its companies with Latin America countries could be one of the lifelines to revive economic growth. Moreover, since trade and investment flows have shifted towards emerging markets in a context of “South-South” links, Spain based on its experience and knowledge of Latin America, should seek to strengthen its role of “bridge” in the growing economic exchanges between Latin America, its “natural” market, and Asia, the most dynamic region in the world today. As discussed in Chapter 5, Spain has competitive advantages in different sectors and business areas, and these opportunities must start to be made the most of as soon as possible. The business cases we have presented here show that it is possible to succeed in doing business with two regions that are geographically very distant but that are destined to grow. In fact, the cultural differences between Asia and Latin America, rather than being an obstacle, represent the area of opportunity for Spanish companies to internationalize and grow.


Chapter 6 Recommendations

Having more examples of successful cases depends, however, on the participation of different actors in the economy: the private sector, public sector and the academic. In this time of great crisis we must join forces and seek out synergies. Spanish expansion in Latin America showed that, in the 90s, where others saw only crisis, the Spanish saw an opportunity to contribute to regional growth and to learn. While Latin American expansion has been very brave, so far, the Spanish expansion in Asia has been very timid, above all down to a lack of talent with experience in the region. The private sector The private sector has been a pioneer in Latin American expansion and achieved benefits of different types that are detailed below. a. Advantages of vertical and horizontal alliances The companies that have already expanded in Latin America must build on that experience in order to enter Asia and to also build bridges between the two zones. The term “enter” Asia refers to either selling products in this enormous market or forming alliances and agreements with Asian companies (or a combination of both). The examples of BBVA and Telefónica provide us with some lessons. First of all, it is possible to find competitive advantages in costs through “vertical” alliances with Asian suppliers. Secondly, alliances of the “horizontal” type permit the taking of opportunities together with doing business and are a way for Spanish firms to gradually make inroads into the Asian market, even if this would not be an immediate entry. b. SMEs and the search for production cost advantages For Spanish companies looking to internationalize, to have a business model that combines cost advantages and access to growing markets is essential. Companies like Alpha and Farmaegara show that it is also possible for small and medium sized enterprises, and is often in a way more agile. In terms of production, while Farmagera produces cheaply in Asia (through vertical alliances with suppliers)

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and sells in Latin America, Alpha Home combines different strategies focusing some of the stages of the production of its products in Asia, others in Latin America, and the higher value added ones in Spain. c. Perspectives on Innovation Asia is a major centre for innovation and Spanish companies must seek to apply Asian innovation to the Latin American market (for example, the applications for smartphones developed in China that Telefonica sells in Latin America). Therefore, it is fundamental to have the vision to distribute what is produced with maximum efficiency, and this refers not only to matters of costs, as we saw in the case of Ficosa International, in their engineering and innovation which is spread over several countries. They must also be looking to increasingly focus their collaboration between the two zones in the innovation that takes place in them. This, together with Spanish innovation, could bring, as a result, a fruitful exchange of experiences and solutions across three continents. The renewable energy field, in which Spain has a strong international presence, could be a particularly fertile field in this “triangular� innovation. d. Access to other goods and services markets Spanish companies must be able to go out and find new markets, identifying needs in Latin America as much as in Asia and looking for the best way to meet the said needs. Alpha Home, for example, sells its products in European and Latin American markets and, also, has sought associations with Asian firms to which they give up the distribution of products in their markets if the Spanish firm does not sell in theirs. The case of Miguel Torres SA is interesting not only as they sell Latin American products in Asia (i.e., the opposite to what companies such as Telefonica or Farmaegara do) but also because they have made a marketing effort to break into the Chinese market.


Chapter 6 Recommendations

Market needs are not limited to products but also include services. Take the case of BBVA, it has taken advantage both of its experience and knowledge of the Latin American market as being of growing economic importance to China with the result of being able to offer services related to Asia (e.g. China Comex of BBVA in Peru). Singapore Airlines has also identified the potential of services by betting on Barcelona as a connection for its flights to Latin America. The movement of people, particularly tourism, is a promising industry on both the Asian and Latin American sides. In general, penetration in another market requires time because, as shown in the Garrigues case, knowledge of Latin America gives a competitive edge when entering Asia and it is also important to build business connections before offering services that connect two very distinct regions. This knowledge of Latin America is also an asset by which Spanish companies can further benefit in areas such as infrastructure, construction and renewable energy development, those seeking Asian associates to develop projects in the region. e. Access to financial resources Spanish companies must also look beyond only strengthening themselves in the purely commercial sector. Repsol YPF, for example, has taken advantage of its insertion in its natural market in Latin America to obtain financing from a Chinese giant. Spanish companies must also therefore search out similar areas, that require large amounts of investment, such as infrastructure and renewable energy, so as to develop large projects whose financing can be undertaken by Chinese firms and banks endowed with a lot of liquidity. f. Knowledge of corporate culture Also noteworthy is the importance of corporate culture and of identifying “the best practices� in dealing with Asian companies, which may involve the participation of Asian employees in operations in that region (which is part of Garrigues’ success) and a timely coordination between the offices of the

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Recommendations parties involved in the operation. At this point it’s fitting to take into account, as an example to follow in ties with Asian firms, Repsol’s experience in their relationship with China’s Sinopec. The negotiation was described by the Spanish firm as fast, and as part of a constructive attitude and an understanding of the values of the other party. The Public and Academic Sectors The public and academic sectors can and should play a greater role since they are the other fundamental pillars needed to strengthen the role of Spain as a bridge between Asia and Latin America. Academia is a key means in connecting human resources, business and knowledge between the two regions. Although the role of education is important at all levels, from the study of language to cultural themes (and where the Cervantes Institute plays a central role), obviously it is the business schools that would bring a greater impact on an entrepreneurial level. a. Attracting talent and human resources that look to other continents Both in the study of language as in business, Spanish schools should seek to attract Asian students interested in Latin America. Spain’s linguistic, cultural and economic connection with the region can be enhanced as a gateway to it, for example through the study of Latin American businesses in Spain, or an offer to study in Spain that includes work experience in Latin America. In this regard, we are pleased to be able to clarify with a recent example that Spain is moving in the right direction in terms of public-private cooperation: at the close of this study a major program was announced that places Barcelona as the true academic bridge between the two regions: the Ortelius program led by the Autonomous University of Barcelona and sponsored by Banco Santander. In Chapter 5 we also mentioned other success stories, such as the Asian-Latin American Master’s programs in business run at institutions such as the Pompeu Fabra University and the University of Navarra.


Chapter 6 Recommendations

It’s important to take into account that universities are a means of attracting human talent from abroad. The direct impact would be the development of Spain as an educational power, coupled with widespread economic benefits that this entails. The indirect impact is that these human capital would later become the key to doing business on other continents. b. The Tourism Sector As for the public sector, it must not only promote educational exchanges with Asian and Latin American institutions but also facilitate trade fairs and international events so that Spanish companies have better access to foreign markets. In the tourism sector specifically, promoting Spain as a gateway to Latin America among new Asian tourists is a great opportunity. Spain is the third largest tourist destination in the world. An increase in tourism in Spain itself has substantial economic benefits. But it can also provide services for tourism destined for Latin America. Asia-Spain-Latin America flight connections form part of the said services and maintaining an adequate infrastructure is fundamental to being able to offer them. c. Cities as poles of attraction Cities are centres of international business development. Local authorities should carry out campaigns in Asia on the ties that Spanish cities have with Latin America, from its role as a gateway in terms of transport, to logistical issues such as the movement of goods (for example, the role of the Port of Barcelona) and strategic factors such as the localization of corporate headquarters in the cities. In other words, the Spanish cities and their companies must be able to take greater advantage of their chance to be seen as gateways to both Latin America and Europe, in order to achieve along with it, being situated on the maps of Asian companies who want to expand on both continents and therefore can

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Recommendations install their headquarters for Latin America and/or Europe in Spain. And given that Spain’s competitive advantage is in industries with high added value, the cities must create their own “brand” as “cities of innovation”, and Barcelona’s approach is interesting here, with its multiple fairs and institutions dedicated to the topic (22@, HIT Innovation, GSM Congress, etc.), a brand that could be used specifically to strengthen innovation bridges between Asia and Latin America. To finish, it is important to emphasize that Spanish cities must globalize as soon as possible. Barcelona is commonly described as a European and Mediterranean city, but at a time of great crisis in Europe it’s important to amplify one’s vision and to look to emerging countries. The issue of which industries develop is important, but so is the subject of geography, and the emerging world is today the key to growth. Barcelona also has an important role in retaining institutions such as Casa Asia and attracting new ones in relation to Latin America and Asia. Finally, in this era of great crisis in Europe and the West it’s important to extend one’s vision, join forces to overcome the paralysis and do more with less. The synergies between the private sector, the public and civil society must help us to provide us with the vision needed to situate ourselves in new industries and new geographical areas in which we can grow, and learn.


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Introduction Chinese foreign investment has experienced strong growth in recent decades, and this trend is expected to continue in the future, not only in regions that have traditionally been the recipients of Chinese investment (U.S. and Europe) but also in areas that, such as Africa or Latin America, are to be found on the path to development. Among the factors that have fostered the growth of Chinese foreign investments, it also fitting to point out the government supported policies that have been adopted (the policy of “going out into the world� initiated by Hu Jintao, China’s current president). In recent years, the Chinese government has enacted laws and regulations designed to clarify and regulate those legal and tax aspects which apply to local Chinese companies wishing to invest abroad, and has provided financial aid and grants to investment projects in Latin America. It is necessary to take into account from the outset that in China there exists a specific system that regulates and restricts foreign investment. This system is fundamentally based on the requirement, in many cases, of obtaining authorization prior to the completion of the investment project in question, as discussed in detail in this chapter. For this reason, when it comes to the point of initiating an overseas investment, Chinese companies must not only take into account the aspects that, in general, come into consideration when undertaking a project of this type (which jurisdiction is more favourable from a tax and legal point of view when going through with the investment, through which investment route, greenfield or 287 Written by Manuel Torres Salazar, director partner of the Garrigues office in Shanghai, and Diego Dalma, lawyer of this office.


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brownfield is the project going to develop, what is the most beneficial legal and financial structure, etc.), but they must also meet the legal and fiscal requirements established by Chinese legislation on foreign investment material. In this sense, the first part of the chapter summarizes the main features of China’s legislation on foreign investment undertaken on the part of Chinese national companies. It goes on to elaborate upon the main legal aspects to be considered by Chinese investors wishing to invest abroad and, finally, there will be special emphasis put on those factors that make Spain a convenient platform for Chinese companies to structure, through the constitution of a corporate vehicle in the said country, their investments in Latin America. 1. Chinese regulations on foreign investment 1.1 The Legal Perspective The regulatory framework on Chinese foreign investment consists of a series of measures and regulations promulgated in the first decade of the 21st century by the different authorities: MOFCOM (Ministry of Commerce), SAFE (State Administration of Foreign Exchange) and NDRC (National Commission of Development and Reform). These three authorities comprise all three levels of control that Chinese legislation provides for foreign investment operations. NDRC is responsible for the planning phase of the investment project. MOFCOM, for its part, is in charge, among other things, of approving the relative contracts for the operation concerned. Finally, the SAFE control mechanism comes into play at the time of the foreign exchange transfer, among other situations. A) National Development and Reform Commission (NDRC) The first barrier that must be overcome to start an investment project is governed by the following provisions: a) The Provisional Measures for the Review and Approval Procedures on Investment


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

Projects Overseas, promulgated on October 9, 2004 by the NDRC which includes the requirement of obtaining the Commission’s approval in those cases of investment relating to the exploitation of natural resources that exceed a certain investment threshold, and in cases where it is needed to provide the investment project with an amount of foreign currency over a certain amount. This approval requirement becomes tougher in cases of larger scope, demanding they have not only the approval of the NDRC, but also of the CEO. b) Circular on issues related to the Management Improvement of Foreign Investment Projects, promulgated by the NDRC on June 8, 2009. This circular provides that, in certain cases, before acquiring a foreign company, the Chinese company must submit a report to the NDRC for it to conduct a review and identify whether there are “adverse factors” that exist in the operation under analysis. B) Ministry of Commerce (MOFCOM) Once beyond the first level of control, it’s necessary to gain MOFCOM’s approval (state or local, depending on the cases) for certain investment operations that, due to special circumstances that they involve, are so required. These special circumstances make reference to, for example, the geographical destination of the investment (countries not maintaining diplomatic relations with China), the high level of investment or their target sectors (sectors are considered sensitive, to the effects of obtaining the approval of MOFCOM, those relating to energy, mineral extraction, etc.). In this context, responsibility for regulation consists of the Measures for the Administration of Foreign Investment Abroad, promulgated by MOFCOM on March 16, 2009. Other foreign investments undertaken by Chinese companies are not subject to the review and approval of MOFCOM, neither on a central or provincial level. In these cases, the investor need only submit an application to invest abroad and will receive a license for that investment within the space of three days. C) National Administration of Foreign Currency (SAFE)

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Legal Annex Finally, the last step that must be taken is the registering of the operation of foreign investment with SAFE. It’s no longer necessary for Chinese companies to submit an application to SAFE for the approval of foreign investment. A registration process with the said agency is enough to meet the legal requirements of SAFE for overseas Chinese investment, Chinese companies recently having been able to use for such investment funds coming from their foreign reserves, reserves gained from business activities conducted abroad and foreign currency purchased in Chinese RMB, all in line with the requirements of SAFE. It is also envisaged that Chinese companies can finance, in the form of loans, guarantees and funding, its subsidiary businesses that are resident abroad, within certain limits. In addition to the registration of foreign investment operations, SAFE is responsible for various tasks relating to the fixing of the maximum amount of external financing that the company established abroad can receive, the maximum percentage of equity in the foreign subsidiary or the total value of foreign investment. The measures that reflect these issues are the following: a) Regulations on Exchange Control relating to Direct Foreign Investment by Entities in China, promulgated on July 13, 2009, and b) Circular on Certain Issues Relating to the Administration of Foreign Currency destined for External Loans granted by Domestic Companies, entered into force on August 1, 2009 1.2 Tax Perspectives From a tax perspective, there are peculiarities in the Chinese regime of foreign investments that should be made known and taken into account. It’s fitting to mention Circular No. 59, Opinion on the Improvement of the Tax Administration Service for Chinese Companies “going abroad” (Circular No. 59), enacted on June 10, 2010. This circular developed tax legislation applicable to foreign investments, including certain obligations of a non-tax nature such as the need of communication before signing or modifying any foreign investment contract, as well as diverse antimonopoly standpoints.


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

In general terms, the corporate tax system in China is based on the existence of a tax on the profits of corporations (Enterprise Income Tax or EIT) which taxes the worldwide income of the same, so that when a Chinese company records revenues from a foreign source, either in the form of dividends coming from its foreign subsidiary, by integration of income from a foreign branch, or via payments of intra-group loans in the form of interest, royalties or fees, it also must pay the tax on such income in China, subject to the conditions that they manage to establish agreements to avoid double taxation signed between China and the destination country of the investment. Despite that which is explained above, to avoid an excessive tax burden derived from having to put up with double taxation in relation to income from a foreign source, Chinese law recognizes a “right to foreign tax credits� (Foreign Tax Credit), the amount of which being that which has been paid in taxes in the destination country of the investment. This right to foreign tax credit allows the local Chinese investor, at the point of realizing the EIT declaration, to calculate the net of tax already paid abroad in a maximum amount corresponding to that which would be payable in taxes to the EIT in China, being able to, should the tax actually paid exceed that amount, apply for the excess in the next 5 years. In relation to this issue, Circular No. 59 clarifies certain practical aspects such as the calculation of income from a foreign source that is subject to taxation. In relation to the other fundamental Chinese tax, the Business Tax (BT), states that as long as, among other cases, a service is provided by a company established in China or the service recipient resides in Chinese territory, the company it provides is subject to BT. This could be the case of intra-group loans mentioned in the previous paragraph, which, having the local Chinese investment company as lender, would be subject to BT. Circular No. 59 does not describe the mechanism for avoiding double taxation as is the case when in the foreign country the said provision of services has a tax levied on it similar to that of BT China, but later legislative developments

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Legal Annex regarding this matter are hoped for. In particular, it envisages the elimination of BT and integrated into the Chinese tax system an equivalent to the tax on added value or Value Added Tax (VAT) in 2013. It is also hoped that future reforms are carried out in the VAT system for imports and exports related to foreign investments made by Chinese companies to encourage such undertakings. The current system already includes some beneficial content for investment abroad. Specifically, it states that companies investing abroad can, in general, recover the amount of VAT incurred in the acquisition within Chinese territory of machinery and equipment that have gone to or been provided by foreign subsidiaries so as to be used by these companies. 2. Legal and Tax Issues to Consider When Investing Abroad Once we have explained the outgoing rate on foreign investment in China, we must analyze the issues to be considered from a legal and tax standpoint in the country where the investment is being made, to be able to decide how to articulate the investment abroad and, more specifically, what aspects should be weighed up when investing in Latin America. 2.1 General Questions Firstly, it is important to analyze the general legal framework of the country the investment is destined for, and in particular the specific regulation on foreign investment and foreign exchange controls. Knowledge of the legal framework should not restrict the content of the standards, but rather it is vital to know the relative practice regarding the application and interpretation by the relevant courts and administrative bodies, in order to determine the feasibility and stability of the legal and fiscal framework of a country. There are other factors, that are closely related to the reliability of a country’s legal framework, to consider: i) the existence of Bilateral Protection of Investment Treaties (BIT) between the country of origin and the country the investment


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

is destined for, as they constitute a way to counter the legal uncertainty of the investment’s country of destination, and ii) the existence of Agreements to avoid Double International Taxation (CDI) with the state that the investment came from and, in their case, the fact that the said agreement makes passive income, so that the investor can calculate the fiscal costs of their investment and establish a tax optimization strategy. Secondly, the foreign investor must focus on the legal and tax structure of the investment project. Overall, there are two main ways to conduct foreign investment: i) greenfield investment or the creation of new business or ii) brownfield investment or the purchase of an existing business, conducted mainly through the operations of mergers and acquisitions. The latter type of investment is shown as preferred in most cases of investment abroad and it is this type of operation which can be affected by anti-trust regulations or free competition. Also, when making the decision regarding the form of investing, it is necessary to take into account the fiscal costs of each of the alternatives considered. Thirdly, it’s necessary to consider the form of financing the investment, trying to find the right balance between debt and equity capital depending on the type of project concerned. However, this theoretical analysis of the optimal financing structure, should be completed with a mention of the restrictions that may exist in relation, for example, the percentage of distant financing that foreign investors can access, or the tax rules relative to the financing (for example, tax treatment of interests in the target country, regulations in terms of sub-capitalization). 2.2 Specific Questions on Latin America Besides the general questions to consider upon making a foreign investment described in the previous section, it’s right to place special emphasis on the specific characteristics of Latin American countries. In general, we can say that Latin American countries have only recently become liberalized markets, which have severe restrictions on investment and have been

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Legal Annex less open than other more developed regions such as Europe, the USA, Canada or Australia. In this sense, the application of protectionist measures by their governments can often be observed, in an attempt to favour local production in the face of foreign. However, it may not be the protectionist measures which are of most concern to the foreigner investing in this geographical area, but rather the “sword of Damocles”, in these areas it is usually the prevailing legal instability, patently evident in the cases of the nationalization of businesses, changes in normative and tax law, failures in administrative practice of the clauses included in the CDI or other international treaties signed by the Latin American state in question, as well as a certain lack of uniformity in the behaviour of the bureaucratic team that feeds the lack of trust among foreign investors. On the other hand, it’s important to highlight cultural differences and ways of thinking between the Latin Americans and investors from other regions, which often, can be a relevant factor in the development of the investment project. As regards the forms of investment, it was found that the most common form of channelling investments in Latin America is through foreign investor’s mergers and acquisitions with local companies. This option has been preferred over the implementation of newly established companies due to the advantages of accessing a new market and having a certain amount of knowledge on it provided by the acquired company or subject to the merger. In addition, with its knowledge of the market, the local company brings to the project local directors that improve management and a stable structure with a local business model. Similarly, Chinese investors in the region can control the investment risk they want to assume, being able to opt for a majority or minority share. However, investments made through brownfield pathways also have certain disadvantages. These are embodied in the greatest difficulties that the foreign investor finds when they proceed to the negation of the investment operation and the consequent prolonging of the investment process. Furthermore, the acquisition


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

of a local company supposes the undertaking of its accumulated baggage of legal and tax issues that could drag past exercises along with them, as well as weaknesses and inefficiencies of its own structure. Finally, another negative aspect of undertaking an investment project via a model of acquisition or participation in an existing business may consist of, in this type of investment, both the political and economic rights of the Chinese investor having to be shared, in the proportion and according to the appropriate corporate legal system that corresponds to it. 3. Investment Structures Commonly Employed for Investment in Latin America Taking into account all legal and tax factors cited in the preceding paragraphs, the establishment of a European holding company would be one of the most common options for investing in Latin America. The example could be taken from Spanish organisations in their taxation of Entities Holding Foreign Securities (ETVE, for its Spanish initials), presented as an optimal alternative for the channelling of investments in Latin America. The European holding organisations, and so the holding companies with foreign interests, can bring together diverse advantages for Chinese investment in Latin America, discussed in detail previously, and that can be summarized, in general terms, as the following: a) a favourable legal and tax framework for Chinese investment and the channelling of the returning profits from Latin America to China, b) access to an extensive network of BIT and CDI with Latin America, and c) presence in Europe, and for the European market of Chinese investment in Latin America. The cited investment structure is summarized in the following section:

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Legal Annex Apart from the above aspects, in general terms, a holding company that has an investment project abroad can provide the following legal and tax advantages: · The concentration of foreign investment in the holding company, separate from other companies in the investment group, may give more flexibility to an associate’s entry in the said investment or at the point of being floated on the stock exchange. If, moreover, the holding company is in a European country rather than in the Latin American country that the investment is destined for and conditioned by a stricter legal framework than Europe, investors may benefit from greater legal flexibility in the said European country, in aspects such as the political and economic rights of the company or in the raising of financing and capital. · A holding company, specifically, in Europe can allow Chinese investors access to the European market through its investment structure for Latin America. · In the section on tax, the share-holding company, that will generally be newly established, will be able to avoid the fiscal restructuring costs of the Chinese associate that wants to decouple assets and the business of foreign investment risk in China. And in many cases, the holding company will facilitate the repatriation of profits coming from the investment in Latin America in a more efficient form taxation. In the case of Europe, it could gain access to a larger network of IDUs/ CDIs with the Latin American region. Finally, funding flows and the results of a future European corporate structure may face a more attractive tax situation in the single European market, and thanks to the various European Directives. In a peculiar case, within the companies called European holdings, Spanish tax law includes the Entities Holding Foreign Securities (holding companies). A holding company of this type is an organisation resident in Spain in which associates can invest, whether being real people or legal organisations, resident or not in Spain and dedicated to the holding of investment securities located outside Spain.


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

The Spanish holdings system has many advantages to carrying out Chinese investment in Latin America through it, described below: A) Taxation of Entities Holding Foreign Securities (ETVE) In the fiscal section, the Corporation Tax (IS) corresponding to the holding the ETVE, requires that the company in question has as its business purpose the activating of management and administration of shares in companies that do not reside in Spanish territory, with the appropriate organization of material and human means. Which is to say, the ETVE will focus on the management of investments established abroad, that is, outside of Spain. Therefore, an ETVE constituted by a Chinese investor (either alone or jointly with other partners) who is engaged in investment management in Latin America can enjoy the tax regime which will be explained below. Under certain conditions, the ETVE may benefit from the general advantages present in other European tax systems for holding companies (such as exemption of dividends and capital gains coming from foreign investment or access to CDI). But, to add to that, the ETVE brings together special tax characteristics, which can benefit the Chinese investor. Specifically, an ETVE is characterized by the distribution of benefits to non-resident associates in Spain, as well as the obtaining of capital gains from these partners, they’ll not be subject to taxation in Spain, if they meet certain requirements. Therefore, if a Chinese investor desires to sell their shares in the ETVE, the capital made by the said operation would not be subject to taxation in Spain. The tax benefits described above are applicable as long as they meet the requirements described below: i) The ETVE has to participate directly or indirectly in the capital or equity of the non-resident company (foreign investment) through the ownership of, at least, 5% of it for a minimum of one year. ii) The participating non-resident company must have been levied by a foreign tax of an identical or analogous nature to that of the IS (this requirement shall be met when the share-holding entity is resident in a country with which Spain has a CDI).

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Legal Annex iii) The shared or enjoyed benefits must be derived from business activities carried out abroad. iv) The subsidiary companies of the ETVE and its direct partners cannot reside in tax havens. v) The holding ETVE must have adequate human and material resources to manage and administer the shares in foreign entities. The following table summarizes the tax characteristics resulting from the employment of an ETVE:

B) Access to Agreements and Reciprocal Investment Protection (APPRI) and Double Taxation Agreements (CDI) In general terms, European countries have a large number of international treaties with Latin American countries. However, Spain, due to its historical ties to the Latin American continent, has more enthusiastically promoted both BIT and CDI with Latin American countries. Access to Agreements and Reciprocal Investment Protection (APPRI) Spain relies on an extensive network of Agreements for the Promotion and Reciprocal Protection of Investments (APPRI) with Latin American countries. The following table shows the countries with which Spain has signed, to date, this type of agreement as well as the date that it entered into force.288 288

Data taken from the website Invest in Spain and several Latin American government sources.


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

The APPRI are bilateral treaties that establish the general conditions for guaranteeing and protecting the economic and legal interests of investors in each of the signatory states when they invest in the territory of another contracting state. Its clauses are strictly enforced and create an environment of legal security and stability by regulating the treatment their investors must receive in the other party’s territory, in accordance with the provisions of national law and following the rules of International Law. In general, several clauses designed to avoid inequalities in the treatment accorded to foreign investors, form part of the contents of the APPR. Among the most important we find the clause on “national treatment” which prohibits the imposition of demands that must only be met by foreign investors, and the clause that establishes a “fair and equitable treatment” for foreign investments. The latter refers to the obligation of the state receiving foreign investment to not have an attitude toward foreign investors that would be contrary to the object and purpose of the agreement. Finally, it’s fitting to underline the principle of most favoured nation, including in most of the APPRI, which guarantees equal treatment to all foreign investors regardless of their nationality, equally as favourable as that accorded to state nationals who count on the best possible treatment.

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Legal Annex Another example of the most relevant contents of such agreements is made up of the provision of compensation in cases of expropriation, so that, if the state receiving the foreign investment approves the seizure, expropriation or nationalization of any assets owned by a foreign investor, must be compensate by it. Although China has signed APPRIs with its key partners in Latin America, namely Colombia, Costa Rica, Cuba, Peru, Chile, Ecuador, Uruguay, Argentina and Bolivia, it would still be possible to benefit from the guarantees that this type of agreement generates for foreign investors in other territories with which it has not signed any agreement, but with Spain it has done so. In this sense, for a Chinese investor to be able to benefit from their rights under the APPRI which Spain has signed with Latin American countries and with which China has not signed an international BIT treaty or similar, it is necessary that the Chinese investor in question structure their investment in these countries through Spain by the constitution (or acquisition of shares) of a society or branch. When comparing direct investment in Latin America with the investment made through a company or intermediate vehicle established in Spain, the numerous advantages of the latter option with respect to the first become patently evident, although the business structure requires greater complexity. The disadvantages of the first option are derived from the fact that the Chinese investor would find themselves in a situation of legal uncertainty in some countries and would be exposed to the national risk of the state concerned. Through the APPRI the Chinese investor could get the predictability of the applicable legal framework, which is otherwise difficult to reach. It is therefore a way of achieving a minimum of security in areas of political and legal insecurity. Double Taxation Agreements (CDI) Likewise, Spain is the European country that has an extensive network of Double Taxation Agreements with the Latin American continent. According to data from the Ministry of Economy, as of September 14, 2011, there were 14 Agreements published in the Official BOE publication.289 289

Data from the website of the Ministry of Economy and Finance.


Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

China, however, as of July 2011, has signed290 Double Taxation Agreements with Brazil, Cuba, Mexico and Venezuela. Again, as discussed above in relation to APPRI, Chinese investors can benefit from double taxation treaties Spain has signed in those countries with which China has not signed an agreement, if they decide to bet on investment in Latin America via Spain. Among the reasons that justify the signing of such treaties between two states is to avoid an excessive burden on the taxpayer and also tax evasion, with the ultimate aim being the promotion of foreign investment (or at least its non-discouragement). Double taxation is a de facto obstacle to foreign investment in any country, and generates a slowdown in economic growth both as much in the host country as in that of the issuer of the investment’s. Double taxation agreements give a country tax deductions on tax paid abroad and even include the benefit of exemption from payment thereof in connection with the income obtained from the development of investment activities abroad. In the absence of double taxation agreements, if the tax burden is high, foreign investors will try to recover the tax cost by setting higher prices on products or services offered, so that finally, in many cases, it is the nationals in the country which is the object of investment who are disadvantaged in the final instance. C) Benefits Associated with European Union Regulations Within the European jurisdictions, Spain has become a country of reference due to, in the first place, the liberal nature of the legal framework for existing http://www.worldwide-tax.com/china/chi_double.asp

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Legal Annex foreign investment in Spain, composed of laws approved both nationally and by European standards. In particular, Spanish law advocates freedom of acts, business, transactions and operations between residents and non-residents involving, or from whose compliance may arise, payments sent or received to or from abroad, as well as transfers to or from abroad and variations in accounts or financial debtor or creditor positions to the outside world without restrictions other than those stipulated in this law (Article 1, Law 19/2003 of 4 July on the Legal Status of Capital Movements and Economic Transactions Abroad). However, the nature of foreign investment liberalization in Spain does not imply that there are not any kind of problem control mechanisms in existence. On the one hand, for general cases, a procedure is required for the declaration of foreign investments, made before the administration, following the making of an investment, and a communication in advance if the investor is from a territory classified as a tax haven.291 Obviously, China does not support this ruling. Secondly, Spain’s membership of the European Union is another positive point for China’s investment plan aimed at Latin America through Spain for two reasons. On the one hand, it allows access to European legal institutions to resolve conflicts that may arise in connection with investments abroad, and counts on the protection of the Community’s Law. In this sense, in the case of conflict between the Chinese investor and the Latin America State receiving the investment, in addition to the national courts it has recourse to make a complaint to the European bodies responsible for the hearing and resolving of such conflicts. Furthermore, Spain, like other European countries such as Germany and France share certain similarities with the Chinese legal system and institutions of law, unlike other countries with legal systems based on case law. Moreover, as a side benefit derived from free trade rules for Member States of the European Union, the foreign investor’s potential market will grow. In the case that a Chinese company constructs, acquires or participates in a Spanish RD 1080/1991 collects a list of territories that have been classified as “tax havens” on the part of Spain.

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Legal Annex The legal and tax advantages of Channelling chinese investment in Latin America through Spain

company with the objective of investing in Latin America, it at the same time would count on the advantage of being able to buy and sell, without being subject to any tariffs, and to transfer capital freely, without suffering any exchange controls, within European Union territory. In this respect, enabling investment through Spain represents an optimum formula for access to two major markets: Latin America and Europe. Finally, note that the dividends and interest earned by European companies in Member States of the European Union, under certain conditions, are not subject to tax and there are numerous similarities in the fiscal/tax systems of European states concerning, among other tax advantages, the possibility of tax deduction on certain losses or to apply tax exemption on dividends and capital gains from foreign sources if they comply with certain requirements. 5. Conclusions The increase of Chinese direct investment abroad is a contrasting phenomenon that has captured the attention not only of the countries belonging to the Asian giant’s main areas of interest, but also of third jurisdictions that can serve as launching points and benefit Chinese investment projects abroad. In the specific case of Latin America, due to the peculiarities of the legal systems of the countries of the zone, as well as the peculiar dominant corporate culture, foreign investors are generally choosing to invest in the territory through mergers and acquisitions with local companies, often using the figure of the European holding company for the purpose. In this regard, the influence and enormous possibilities for Spain as an investment platform in Latin America do not go unnoticed. Its liberal corporate regime, the tax saving opportunities derived from the regulation of Spanish ETVE, its belonging to the European Union and, therefore, access to European legal and

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Legal Annex judicial institutions, as well as their historical ties with the continent, translated into the signing of numerous APPRIs and CDIs, that make Spain the best gateway for the Chinese investor in Latin America.


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Bibliography Berisha-Krasniqi, V., Bouët, A., Estrades, C., Laborde, D., (2011), Trade and Investment in Latin America and Asia: Lessons from the Past and Potential Perspectives from Further Integration, International Food Policy Research Institute (IFPRI) Discussion Paper 01060, January 2011. Casanova, L. (2002), Family Ties: Spanish investments in Latin America. Foreign Affairs in Spanish. Vol. 2, N°2, Pp. 67-85. May 2002. Casanova, L. and M. Fraser. (2009a). From Multilatinas to Global Latinas. The Latin American Multinationals (Compilation Case Studies). January 2009. InterAmerican Development Bank Working Paper. Washington, DC:IDB. Casanova, L. (2009b). Global Latinas. Emerging Multinationals from Latin America. Palgrave Macmillan. Comisión Económica para América Latina y el Caribe (CEPAL) (2010a), La República Popular China y América Latina y el Caribe: hacia una relación estratégica. United Nations, 2010. Comisión Económica para América Latina y el Caribe (CEPAL) (2010b), Foreign Direct Investment in Latin America and the Caribbean 2009, Information Paper, United Nations. Comisión Económica para América Latina y el Caribe (CEPAL) (2011), Foreign Direct Investment in Latin America and the Caribbean 2010 Information Paper, United Nations. Inter-American Development Bank (IDB) (2010), Ten Years After the Take-off Taking Stock of China-Latin America and the Caribbean Economic Relations, Integration and Trade Sector, Inter-American Development Bank, October 2010.


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Bibliography Inter-American Development Bank (IDB) (2010), India: Opportunities and Challenges for Latin America, Special Report on Integration and Trade, InterAmerican Development Bank. Jiang, S. (2011), China-Spain-Latin America Triangulation in a Chinese Perspective, ARI 4/2011, Real Instituto Elcano. Montobbio, M. (2004), Triangulando la Triangulación: España/Europa-América Latina-Asia Pacífico, Documentos CIDOB, Serie: Asia, Número 8, CIDOB in collaboration with Casa Asia. Latin-American Observatory of Asia-Pacific (2011), Latin America-Asia Pacific Annual 2010, Casa Asia. Organización para la Cooperación y el Desarrollo Económico (OCDE) (2008), OECD Investment Policy Reviews: China 2008, París. Organización para la Cooperación y el Desarrollo Económico (OCDE) (2010), OECD Economic Surveys: China 2010, París. Otero, J. (2005), The Spaniard in Asia Pacific, Asia-Pacific Annual 2004, edited by the CIDOB foundation, the Real Instituto Elcano and Casa Asia, 2005. Santiso, J. (2010), China-Spain: A Strategy for Promoting the Locating of Chinese Businesses’ European and Latin American Headquarters in Spain: Madrid, Bilbao and Barcelona, ESADEgeo Position Paper 6, December 2010. Soler Matutes, J. (2007). China-Spain-Latin America, Triangulation from a Chinese Perspective, in collaboration with Graziella Cristiano, CIDOB documents, Series: Asia, Number 14, CIDOB Foundation, co-edited with Casa Asia.


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United Nations Conference on Trade and Development (UNCTAD) (2010), World Investment Report 2010, Investing in a Low-Carbon Economy, United Nations. United Nations Conference on Trade and Development (UNCTAD) (2011), Global and Regional FDI Trends in 2010, Global Investment Trends Monitor, No. 5, January 2011.

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Spain's Role in Economic Ties Between Asia and Latin America Large Companies, SMEs and the City of Barcelona as Bridges Between the Two Areas

This report examines several business cases which purpose is to show that Spanish companies play and can still play a role as a bridge between Asia and Latin America. Emerg ing areas have the highest g rowth in a context of cr isis in the developed countr ies and ar e the sa viour for Western companies. The companies studied are of various sizes, from different sectors and have a role as a bridge between both continents, often associated with Asian companies. On the other hand, companies in Asia or La tin America consider Spain a junction with the other continent. Other impor tant aspects ar e also included, suc h as the r ole of cities, whic h is increasingly important in economic development, and we have furthered studied certain areas with special potential that Spain should de velop in the future. Director of Study: Lourdes Casanova Main Researcher: Eduardo RodrĂ­guez Montemayor Coordinator: Jorge Fuentealba


Spain's Role in Economic Ties Between Asia and Latin America