China eyes Brazil’s intellectual property

Benjamin Schmittzehe is chief executive of M&A and corporate finance advisory firm S&P Consulting, part of the Sustainomics group and based in London and Shanghai. He talked to IT Decisions about the potential for collaboration between China and Brazil and the possible challenges faced by Chinese companies seeking an international footprint.

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Last week was fruitful for Brazil-China trade relations. The mission captained by president Dilma Rousseff has already generated millions of dollars in deals – but what are the drivers behind such excitement?

According to Benjamin Schmittzehe, chief executive of  advisory firm Schmittzehe & Partners, Brazilian industries such as energy and food are of great interest to China, however the potential for partnership is far greater.

“Anything to do with intellectual property would be of interest to China. There are also a number of different sectors where Brazil is quite strong and where China would want to collaborate, such as aviation,” he said.

One of the main challenges for China is geography, said Schmittzehe, so Brazil could be a good strategic location for Chinese companies to set up shop, allowing access to both the Latin and North American markets.

IT market fragmentation

Despite the news of large technology investments prompted by Dilma’s trade mission last week, Schmittzehe believes that the IT sector will be lower down the scale of China’s priorities when it comes to doing business with Brazil.

“China is a market with very few large technology players and they struggle a lot on overseas deals. There are big companies like Huawei, which is already active in Brazil, but there aren’t many of them: very quickly you get down to some very small companies for whom Brazil is a long way away and not necessarily their top priority,” he said.

Market fragmentation, according to Schmittzehe, is also seen in the way in which the different provinces in China promote their IT industry.

“A lot of the [business] execution is done on a provincial level, which means that there is some unusual and competitive behaviour. You have regional mayors trying to convince you to invest in their province instead of others,” he said.

“This can cause confusion, but it also good for foreign companies looking to invest in China – a logical approach would be to shop around and see where you can get the best deal.”

Creating national champions

However, the central government has a consistent message when it comes to the international expansion of Chinese firms. Companies across all sectors are being encouraged to expand overseas to secure strategic resources and develop intellectual property and distribution capabilities. The intention, according to Schmittzehe, is to create national champions to ensure sustained growth.

“It is a competitive market, but also very inefficient. Local players often struggle to compete against the multinationals entering into China, so the government is trying to force consolidation to develop strong national companies that can compete globally.”

Getting access to intellectual property may be what the Chinese companies are interested in, but senior figures in Brazil IT see this as a reason for concern.

“I know of cases where Brazilian technology firms have attempted partnerships with the Chinese, but they just copied everything and never actually invested,” a senior figure in the Brazilian IT sector told IT Decisions last week.

Future priorities

According to Schmittzehe, China’s five-year development plan published in December presents a number of ramifications in terms of the country’s economic goals and strategy going forward.

While some key areas of focus during the five-year period are domestic – such as attempts to narrow the rich-poor gap and spreading wealth inland into poorer regions – some are related to China’s international positioning, including the country’s drive to move up the value chain.

“One of [China’s] objectives is around moving away from a low-wage, labor-based economy to moving to high-end sectors, or areas where they have more intellectual property,” said Schmittzehe.

In order to achieve that goal, challenges that will be faced along the way include the improvement of distribution capabilities.

“In the past, China relied on third-parties to do distribution overseas, but when you move up the value chain, you start wanting your own research and development,” said Schmittzehe.

“So it is necessary to invest in distribution channels and also to look overseas and assess which brands and distribution channels can be accessed from a collaborative, M&A perspective,” he said.

Click here to listen to Ben Schmittzehe talk about the 5-year plan in China

Click here to listen to Ben Schmittzehe talk about the market size in China

Click here to listen to Ben Schmittzehe talk about scope for Brazil and China to interact

Photo by Cindy K licensed under Creative Commons