For All its Hype, China Turns Out to be a Tough Place to Do Business for LATAM Tech Firms

With more than 500 million Internet users, China looks like a shining beacon for technology companies eager to expand overseas.  Yet for IT and outsourcing companies from Latin …

China Town in Mexico City

With more than 500 million Internet users, China looks like a shining beacon for technology companies eager to expand overseas.  Yet for IT and outsourcing companies from Latin America, the China experience is filled with disappointment and an unending amount of random barriers to doing business. Over the past few years, more than a dozen LatAm IT firms have moved into China, but a majority of them have found that human capital constraints, an immature IT environment and inconsistent governmental regulation have created major headaches. More striking still, many of them have yet to gain a single local customer.

By contrast, Chinese technology firms are making deep inroads into LAC (Latin America and the Caribbean) markets.  Huawei, the Chinese telecom firm accused by US officials of acting as a conduit for China’s military intelligence, is building high-speed broadband network in Brazil. And the Brazil’s Communication Ministry regards the company as its “strategic partner”. Furthermore, search engine giant Baidu has launched operation in Brazil to rival Google’s dominance in the region.

According to a study conducted by the Inter-American Development Bank (IDB), trade between the two economies is expanding by around 20 percent annually over the past decade, thanks in large part to China’s strong demand for energy sources and other commodities. IT and outsourcing services, however, account for less than 2 percent of the trade.

LAC companies, according to IDB, have invested $858 million in China since 2006, less than one percent of total LAC investment abroad. Most of these investors are multinational companies from Brazil, Argentina, Mexico or Chile.

A billion Consumers

“We don’t have any Chinese client for the moment. All of our customers are either Western or other multinationals,” says Gary Grossman, Stefanini’s Director of Service Delivery for the Asia Pacific region.

Stefanini strolled into China, like most of its regional peers, following in the footsteps of its American clients. Upon arriving in the communist country, they signed partnership deals with local Chinese firms and started selling their services. With more than a billion people, China is a huge consumer market. But the road to Chinese consumers is hindered by a string of roadblocks: a distinct business culture, fewer English-speakers, different customer preferences, a complex regulatory environment, and geography, among others.

“I think the main barrier is language. You cannot expect to see English or Portuguese-speaking people wherever you go in China. Knowing Chinese language is critical to dig deeper into Chinese market,” Grossman pointed out.

Stefanini, the Brazilian IT services firm, is, however, optimistic about tapping into Chinese market once it sets up its regional headquarters in China sometime next year.

Facing Barrier after Barrier

Some of the problems faced by overseas investors are something that the government in China cannot resolve in the near term.

“There is a lack of senior or experienced IT professionals in China. We often airlift our employees in Americas asking them to go and work in China,” says Bruno Guicardi, Chief Operating Officer with Ci&T, another Brazilian IT firm which launched operation in China in 2009.

China claims to have its sights set on becoming a global technology powerhouse. With this plan on mind, the communist government has continued to block access to a huge number of Western sites including Facebook, Twitter and Youtube, as the country covertly aims to groom its own technology companies. In addition, the government ensures that foreign firms don’t move alone into the domestic market without a Chinese partner.

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Despite the hurdles, China’s domestic IT market continues to grow. According to Xinhua, the IT services sector grew 32.4% in 2011 to reach US$ 292 billion and software exports increased 18.5% from the previous year.

China: Global Factory, Not Global Market

Over the last thirty years, China has thrown open its doors to perform manufacturing for the world. What has been less clear, however, is how Chinese citizens themselves adapt to the IT wave. “It is hard to know how China consumes IT. There seems to be no strategy in place. The method many Chinese firms have adopted to buy IT seems to be nasty and immature,” Guicardi added.

Like Stefanini, Ci&T, too, does not have any Chinese customers, though its been more than three years since the company launched operation in China.

Some provincial governments in the country offer incentives to technology firms. For example, Argentinean outsourcing firm Belatrix, according to the IDB report, received capital from the government for expanding operation. And Ci&T was given rent-free office space for three years, and the government has refunded a portion of tax the Brazilian company had paid.

To be successful in China, IT companies need to win contracts from the government. But the Chinese Government has its own priorities and its own list of companies to choose from. India’s Infosys took more than a decade to make it to that list.

Whatever be the hurdle, analysts say, LAC cannot afford to break up its marriage with China. Economists at IDB have often said that “it is difficult to make a meaningful statement about Latin America’s economic future without mentioning China.”

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