Louis Liu’s first trip to Ecuador was in 2005. As vice president of international affairs at Fiberhome Technologies, a state-owned telecom equipment manufacturer based in Wuhan, Hubei province, Liu’s task was to penetrate the Latin American market. He chose Ecuador as an entry point because strong ties between Quito and Beijing made the travel arrangements easier.
Fiberhome’s first customer was TV Cable Group, Ecuador’s largest cable company. It then added state-run telecom operator CNT and Telconet, a corporate and wholesale data and broadband provider, to its customer base.
Fiberhome has since expanded throughout the region, selling optic-fiber cables and data products in Colombia, Peru, Chile, Argentina and Brazil. But the company’s Ecuador business is still worth about US$20 million a year and has been posting annual growth of 30%.
"The Latin American market is the second biggest for us globally after South Asia," said Liu. "We recently signed an agreement with Ecuador to build a joint venture factory, which will manufacture cable to be distributed all over the continent."
Fiberhome’s importance to Ecuador was underlined by President Rafael Correa visiting Wuhan during a trip to China in September.
Telecommunications is just one aspect of a massive infrastructure build-out Ecuador has planned for the next few years, and it is courting Beijing as an investor. Chinese direct investment in Ecuador came to US$106.6 million in 2009, up from just US$2.2 million five years earlier. That total far outweighs the sums invested in neighboring Colombia and Peru.
Much of China’s interest in Ecuador is tied to oil and gas. China National Petroleum Corp (CNPC, which also acts through its subsidiary PetroChina), has been present in the country since 2003 when it took over an oil block in eastern Ecuador from state-owned Petroecuador.
Two years later, Andes Petroleum Ecuador was formed using capital provided by CNPC and China Petroleum and Chemical Corp (Sinopec, which is also the name of its subsidiary). Andes paid North American firm Encana US$1.42 billion for its oil and gas assets in Ecuador, which included oil block operations and a stake in a a pipeline that runs across the country.
In 2009, PetroChina agreed to pay Ecuador US$1 billion up front for 2.88 million barrels of oil per month over a two-year period. Then in March of this year the Ecuadorian government said Sinopec was about to commit US$500 million to a joint venture that will develop an oil block in the east of the country.
Ecuador’s reliance on foreign investment in its energy sector has risen after the country defaulted on some sovereign bonds in late 2008, making the international debt market wary. There has since been further uncertainty in the oil industry specifically as the government said it wanted to introduce a new round of contracts with foreign oil firms that would grant the state a larger slice of revenues.
"Ecuador is highly dependent [on foreign investment] in the economic and technology part because we have neither our own large economic resources nor a highly developed energy industry," observed Miguel Rivadeneira, a well known Ecuadorian journalist. "But one of the problems [foreign firms] can face nowadays is a lack of legal security."
Liu of Fiberhome listed political and economic uncertainty among the principal challenges to doing business in Ecuador, alongside the inevitable cultural barriers. These sentiments are echoed by Cheng Dawei, a professor at Renmin University and chief expert at the WTO Affairs Center in Beijing, who has studied Ecuador. "If you want China to invest in Ecuador, the political and legal environment must be strong. I heard from some Chinese oil companies that they face some challenges dealing with political issues," Cheng said.
Nevertheless, Chinese investment in the country continues apace, and not just in the oil and gas sector. China Development Bank in September signed a US$1 billion loan deal with Ecuador, US$200 million of which will reportedly be used for oil projects, with the remainder to be spent at Quito’s discretion. Finance Minister Patricio Rivera said infrastructure, mining and telecom projects would be the likely beneficiaries.
Rivera added that the loan ensures Ecuador can meet its budgetary requirements for 2010.
This comes after CAMC Engineering, a Chinese state-owned contractor with considerable overseas operations, in July pledged to invest up to US$1 billion in grain storage, power generation and water conservation projects in Export-Import Bank of China (Eximbank), meanwhile, is focusing on hydropower, having agreed to finance two projects within the last 12 months.
Backed by a US$1.7 billion loan from Eximbank, state-run Sinohydro has begun work on the Coca Codo Sinclair hydroelectric dam, which will sit on the Coca River – a tributary of the Amazon River – in the foothills of the Andes. China will also supply the turbines and other equipment. The US$2 billion dam is expected to have an installed capacity of 1,500 megawatts – sufficient to meet 35% of Ecuador’s total power needs by 2016.
Eximbank has committed a further US$672 million to the 487 MW Sopladora hydropower plant on the Paute River. Gezhouba Group, the main contractor on the Three Gorges Dam project, is leading the construction efforts.
More to come
Ecuador is seeking investment in a host of energy and infrastructure initiatives. These involve electricity – hydro, wind, thermal and geothermal power as well as transmission – water resources management, mining, oil exploration and refining, telecom and logistics. Liu of Fiberhome sees these large investments by major state-owned enterprises as beacon projects that will lead to greater public and private sector participation.
"More and more Chinese companies will go to Ecuador because of this," he said. "A lot of state-owned enterprises are already active in the country and the government is encouraging more investment in Ecuadorian infrastructure."