Monday, May 23, 2022

China's Foreign Agricultural Investment Problems

Chinese investment in agriculture around the world is not the unstoppable "land-grabbing" juggernaut often depicted by news media and NGOs. A recent article identifying difficulties encountered by Chinese outbound agricultural investment indicates that the companies are often ill-prepared to do business outside China. 

An April 2022 article by the China International Economic Exchange Center repeats a series of complaints cited in other articles over the past decade that, arguably, arise from the insular nature of China's own agribusiness sector: a shortage of personnel with language skills, little understanding of foreign cultures or business practices in the host country, failure to interact with local business and government leaders, and lack of experience with international accounting, finance, law and tax practices. Some related anecdotal evidence not cited in the article: when Chinese companies hire foreigners with international skills and knowledge they are typically kept isolated within the company, and Chinese expatriates working abroad often retreat into their office compounds to avoid dealing with the locals. These problems are surely being worsened by the pandemic as China's leadership expels or drives out foreign merchants and teachers, shuts down foreign travel, ramps up nationalist rhetoric, peddles disdain for foreigners, and touts the superiority of China's economic system.

The recipe for agribusiness success inside China doesn't travel well outside the home ecosystem. Cutting cost to the bone is the primary Chinese business strategy at home, and the article faults Chinese businesses operating abroad for skimping on job training, wages and social insurance due to "cost considerations." China's strategy for foreign agricultural investment focuses on state-owned entities as the leading edge of development, including a couple of state-owned companies such as COFCO, the provincial state-farm ("Nong Ken") system, and the Xinjiang Production Corps. Communist leaders think "big" companies are "strong", but these big companies mostly operate as extensions of the government and rely on their Chinese government connections to tell them what to do, set up deals and arrange financing from state banks. Business leaders whose main skill is connections with the Chinese government find themselves adrift and helpless operating in other countries where they have no local government or business connections. 

Complaints about "incomplete" legal and regulatory systems in the host country echo complaints foreign investors make about doing business in China where laws and regulations are vague, fluid and selectively applied by legal authorities to favor Chinese companies over foreign investors. Chinese agricultural companies get a dose of their own medicine when they venture abroad elsewhere in Asia, Russia, and Africa. Companies accustomed to benefiting from a loosey-goosey legal environment at home in China don't know how to handle such a system when they are the foreigners. The article also frets that Chinese companies have no industry association to advocate for them in legal, policy and trade disputes (in China, virtually all such associations are quasi-government entities).

A complaint that regularly appears in such articles is that Chinese companies operating abroad were unable to ship grain, sugar, and cotton home due to the restrictive tariff rate quota system that Chinese authorities describe as a "firewall" to protect China's market. This suggests that Chinese companies launch business ventures abroad--say, growing rice in Cambodia--without thinking about how they plan to market their product. 

Another complaint is political instability and other risks in host countries. China's agricultural investment has gravitated toward impoverished and unstable countries to achieve their geopolitical aims. China has prominent agricultural projects in Pakistan, Laos, Myanmar, Cambodia, Sudan, Ethiopia, and aims to sign an agricultural agreement with South Sudan during the next five years.

A couple of news outlets outside China noted that Russia's invasion of Ukraine threatened China's agricultural investments in Ukraine. Agriculture was a prominent part of China's Ukrainian investment plan launched in 2013 and Black Sea port and logistics facilities belonging to grain traders Nidera and Noble Agri were targeted in COFCO's multi-billion-dollar acquisitions of the two companies. In 2021 China imported ag products from Ukraine worth over $5 billion--composed mainly of corn, barley, and sunflower oil and meal--and COFCO probably handled much of the trade. 

"Sound of Hope" reported that Russia's invasion threatened $9 billion-worth of "Belt and Road" investments in Ukraine, citing specifically the shelling of COFCO-invested port facilities in Odessa. Freight shipments on a railway connecting China with Odessa have been completely suspended. Bloomberg News learned that a COFCO sunflower seed crushing plant built in 2012 was shot up in the Russian attack on Mariupol. Satellite imagery showed holes in the two main buildings and dozens of bomb craters and destroyed houses near the facility. A Canadian Chinese-language article raised concerns about threats to Chinese investments in Ukraine, including a COFCO edible oil storage facility in Kharkiv and multiple port facilities. In February, a company associated with Jiangsu Province's state farm system told investors plans for a $5-million oilseed-production, processing and logistics project in Ukraine had been suspended. 

Investigations of COFCO's emergence as a major buyer and trader of Brazilian soybeans in the Journal of Peasant Studies indicate that COFCO's main strategy was to pay significant premiums for soybeans to boost its market share over its "ABCD" competitors. The rationale for gaining market share was to prevent Chinese importers from being "overcharged" by ABCD companies, but it's unclear how paying extra for soybeans to gain market share achieves the objective of lowering the cost of China's soybean imports.

China's 5-year plan for "international cooperation" in agriculture and rural affairs calls for more outbound investment by Chinese companies. The central planning mentality in the document designates industries, commodities, and countries to focus on, coordination with government departments, a network of foreign agricultural demonstration zones, and the "belt and road" initiative. But the document has no mention of managerial expertise or marketing opportunities as a driver of investment projects. Business plans and language skills optional.

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