On December 21, 2010, China’s State Grid announced a $1 billion investment in Brazil, buying 7 Brazilian power transmission companies. What is State Grid, why is State Grid investing in Brazil, and why does the investment matter?

What is State Grid?

State Grid is China’s largest transmission and distribution company; according to State Grid, the company provides electricity to 88% of China’s “territory.” State Grid both builds and operates its networks. In 2010, State Grid ranked 8th on the 2010 Global Fortune 500, generating $184.5billion in revenues in the last fiscal year.

While State Grid may seem massive, its predecessor, State Power Corp. (SPC), a remnant of China’s thoroughly planned economy, was even bigger. As Sonal Patel of Power Magazine succinctly puts it, “By the end of 2002, China had dismantled its single, vertically integrated utility—the State Power Corp. (SPC), which by then had 46% of the country’s generating capacity and 90% of transmission capacity—into 11 separate generation, transmission, and service units.” One of those units is State Grid.

Why is State Grid investing in Brazil?

In one word: profitability. While State Grid is indeed large, it is not necessarily particularly profitable. According to the Fortune Global 500’s numbers, the company generated over $12 billion in profits in FY2008, $665 million in profits in FY2009…and $334 million in profits in FY2010. Those downward trending numbers may simply reflect State Grid’s increasing investments. However, profitability is still a key concern at State Grid: According to a State Grid executive quoted in Caixin, State Grid only considers forgeign projects with expected returns “two to three times” those expected in China. While future profits from the Brazilian venture are unclear, the Brazil investment is expected to generate $110 million in revenues each year.

State Grid’s investment in Brazil may seem curious or undisciplined, given simultaneous headlines detailing critical coal shortages across China causing power shortages. But State Grid internally emphasizes profitability, and learning from international projects may enhance the company’s ability to be profitable later on.

Why does the investment matter?

State Grid’s Brazil-ward foray is not its first venture into foreign assets. Previous investments or cooperation agreements exist with the Philippines, Russia, Mongolia, and Kazakhstan. The Brazilian venture is perhaps indicative of further international investment and outreach, ultimately rooted in boosting profits at home. Profits can be used to rectify domestic issues, such as lack of electricity in some rural areas.

These international ventures seem mutually advantageous, in theory: the host country gets State Grid to perform a service, presumably because of an attractive offering made by State Grid, and State Grid (ideally) makes profits and is advantaged through exposure to learnings that can be applied back home.

The US, however, seems unlikely to engage in such international power generation and transmission agreements — as makes sense, given nervousness about national security (see: cyberspies on the US electrical grid in 2009). This inability to engage at a deeper level leaves the US-China energy dialogue somewhat stalled—limited to the private sector cooperation, government initiated R&D consortia, joint standards development, and assorted quibbles (including those over rare earths). Perhaps some progress, though, is better than none at all.

State Grid’s move may indicate a more broad trend, Chinese public service providers moving overseas to garner profits. Expanding operations overseas has the dual benefit of potential immediate profits and a learning experience in different power systems. What does it mean if State Grid continues to struggle with profitability? Only time will tell. But, if current investments don’t yield expected returns, look for State Grid to seek new opportunities to boost profits—either at home or abroad. Either way, any time two of the worlds largest emerging economies make a deal of this scale pertaining to their basic electrical functions, it is worth keeping an eye on.