Chinese firms do brisk business in Venezuela despite idle factories

SAN FRANCISCO DE YARE, Venezuela (Reuters) - Five years after Chinese home appliance maker Haier agreed to build a $912 million factory in Venezuela, its washing machines and refrigerators are almost the only ones available in the country’s department stores.

Yutong buses are seen during the opening ceremony of a new avenue and the inauguration of a public transportation route in Los Teques, Venezuela May 16, 2015. REUTERS/Marco Bello

Those appliances, however, are not made in Venezuela.

They are instead imported from Haier factories in China and paid for through an oil-for-loans deal dating from 2007 under which China lends cash and is repaid in crude and fuel.

The cost of leaving Haier’s facility idle is primarily borne by Venezuela’s socialist government, because its construction was bankrolled with $800 million borrowed from China.

While most foreign firms are being battered by Venezuela’s currency controls and product shortages, Chinese companies like Haier are doing brisk business thanks to cooperation deals that give them privileged access to the OPEC nation’s economy but leave business risks in the government’s hands.

The Chinese loans - some $50 billion since 2007 - have shored up Venezuelan finances at a time when low oil prices have prompted default concerns and effectively shut the country out of global capital markets.

But Venezuela is struggling to make good on promises that Chinese financing would spur new industries and reduce its century-old dependence on the oil industry.

China, on the other hand, has won a steady supply of oil for its economy and lucrative contracts for its companies to export goods to Venezuela, sometimes in the shadow of China-backed factories meant to produce those very goods locally, a Reuters review of dozens of official Venezuelan documents found.

Bus-maker Yutong sold $353 million worth of buses upon agreeing in 2013 to help build a factory, which today consists of a patch of cleared land dotted with construction equipment.

Heavy machinery firm XCMG closed an export order of $745 million after agreeing in 2011 to help build a local facility, the location of which has not been determined.

Venezuelan state oil company PDVSA bought dozens of drilling rigs from China despite having built a rig production facility through a joint venture with a subsidiary of Chinese oil giant CNPC. The facility is not producing rigs, according to workers.

Late socialist leader Hugo Chavez, who negotiated the deals with China saying they would foster a vibrant manufacturing sector, predicted the Haier factory an hour outside Caracas near the town of San Francisco de Yare would start up in 2012.

“We’re going to build a factory with the support of China, the support of Haier, to make home appliances,” Chavez beamed in a 2011 television broadcast featuring Yare’s traditional ‘dancing devils’. “Right now we’re bringing them in, but soon we will be making all of that here.”

At the entrance to the Haier compound, the only visible activity on a recent visit was of workers milling around below a gate embossed with Chinese characters.


Haier secured a supply agreement for 3 million home appliances, also financed by the oil-for-loans program, which had generated $1 billion in revenue as of 2014, according to foreign ministry documents seen by Reuters. It is not clear how much cash, if any, Haier put into the facility.

“While Haier’s cooperation in the country started through projects to sell household appliances, this has developed into a deeper commitment to serve our Venezuelan customers,” Haier said in an emailed statement, noting test operations began in 2012.

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“Production lines are now readied ... once the related facilities are put in place, mass production in the industrial park will start.”

Venezuelan officials say opposition criticism of the China relationship is meant to undermine President Nicolas Maduro, who was elected in 2013 after his mentor Chavez died from cancer.

They note that joint ventures with device-makers Huawei and ZTE and cloud computing giant Inspur have assembled millions of cell phones and laptops in Venezuela.

Though the operations benefited for years from a steady supply of dollars - a crucial benefit at a time of strict currency controls - production dropped at all three in 2014 for lack of hard currency.

XCMG declined to comment. The other companies, along with Venezuela’s industries ministry, did not respond to questions. Securities filings to China’s stock exchanges generally make little more than fleeting references, if any, to Venezuela.

Still, the China deals ensure supplies of manufactured goods that are otherwise scarce.

Chinese cars are given away or sold cheap by state agencies to soldiers and civil servants, helping satiate a starved market. Haier appliances have been widely distributed through a government program called My Well-Equipped House and now fill shelves of private retailers.

“My refrigerator broke and there are no spare parts to fix it, so I came to get one of these Chinese ones,” said retiree Ivonne Teran, 59, standing in line outside a Caracas store filled with Haier fridges - the only brand available.

The alliance began in 2007 as Venezuela sought new sources of financing and China wanted to secure steady crude supplies. Both wanted to reduce U.S. influence in Latin America.

They created the Joint Chinese Venezuelan Fund, which has received $30 billion, and the $20 billion Large Volume and Long Term Fund. Venezuela in 2014 shipped 630,000 barrels per day of oil and fuel under agreements with China, part of which went toward servicing loans, according to PDVSA’s 2014 annual report.

China has recovered more than half of what it has lent. In contrast, outstanding foreign bonds issued by Venezuela and PDVSA total $69 billion.

“The scale of China-Venezuela practical cooperation is very large ... The sectors are broad and the results are very good,” Chinese Foreign Ministry spokesman Lu Kang told reporters.


Venezuelan ministries or state-run firms typically tap the funds to build power plants, dredge waterways, or revamp sugar mills, using Chinese equipment and advisors, according to documents detailing some 200 projects being financed in 2014.

Reuters’ review found that, under the bilateral arrangement, nine Venezuelan ventures were formally created in which Chinese firms own equity stakes. These include a food production company, the Haier and Yutong plants, three device assembly plants, and three oil industry ventures.

Venezuela does not publish comprehensive lists of Chinese-funded projects or their completion status.

An important benefit for some Chinese firms is bypassing currency controls, which regulate access to dollars for imports or remittance of profits to foreign headquarters.

Venezuela has slashed dollar sales as oil revenue dried up and steadily devalued the bolivar currency, creating billions of dollars in losses for multinationals and crimping auto assembly as the likes of Ford Motor Co and General Motors struggle to import parts.

But China’s Chery Automobile Co Ltd receives only dollars for parts sold to an assembly facility that is majority owned by Venezuela’s government, according to a Chinese national who worked at the Venezuela venture.

That facility brought in more parts as measured by weight than GM and Ford combined during the first 11 months of 2014, according to a Reuters analysis of import data, despite having less than half of those companies’ combined assembly capacity in Venezuela.

Chery has also benefited from exports of cars manufactured in China, billing $140 million in 2013 alone in operations financed through the bilateral arrangement. Chery did not answer questions. GM and Ford declined to comment.

Venezuelan officials say Chinese funds come with fewer strings attached than those provided by multilateral lenders such as the IMF or the World Bank.

“Nobody comes here to put conditions on our revolutionary government as to what we should or shouldn’t do with the resources,” said Planning Minister Ricardo Menendez, who heads the China-Venezuela commission, in an interview.

He called Chinese funding a vote of confidence that will help Venezuela produce more of its own goods.

That does not appear to be the case of drilling rig producer ICTV, majority owned by PDVSA with a 15 percent stake held by China Petroleum Technology & Development Corporation, a division of China National Petroleum Company.

ICTV opened in 2009 with plans to assemble rigs from imported parts and later to manufacture them from scratch.

After investing $150 million, ICTV assembled a combined total of 13 rigs in 2010 and 2011, according to PDVSA reports. But in 2011 and 2012, PDVSA purchased 86 fully assembled rigs from China.

ICTV workers, who filed a complaint with the national comptroller’s office alleging corruption, say the plant produces replacement parts but no rigs, for lack of materials.

CTPDC and PDVSA did not respond to questions.

Additional reporting by Jake Spring, Aizhu Chen and Michael Martina in Beijing, Sue-Lin Wong in Shanghai, M.B. Pell in New York, Cesar Montes in San Felipe, and Maria de los Angeles Ramirez in Puerto Ordaz; Editing by Andrew Cawthorne and Kieran Murray