Import Substitution, only without the “Substitution” bit

Haier and Haier

Reuters’ has this intriguing investigative piece on the weird dynamics of Chinese investment in Venezuela.

The way this seems to work is:

1. A Chinese company announces it’s going to build a shiny new plant to produce a given product in Venezuela
2. The Venezuelan and Chinese governments both dump a bunch of money into the project
3. The factory never gets built, or is built and operates at a fraction of the initially announced scale
4. The Chinese company ends up importing the same product it had initially said it would make locally from China into Venezuela

It’s a pattern that’s been repeated over and over again. Witness:

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.

What we have here a kind of Import Substitution strategy, but without the substitution bit.

Why does it happen?

Well, it doesn’t seem to make sense. And if there’s one thing I’ve learned over the last 12 years is that when something in Venezuela doesn’t seem to make sense, you follow the cheap dollars. I’m going to go out on a limb and guess approving the Venezuelan-factory was a needed step in obtaining cheap dollars for the Chinese companies involved: cheap dollars they could use to import stuff they made in China into Venezuela and make a royal killing.