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LATIN TRADE

SPECIAL REPORT: NEW OPPORTUNITIES FOR SME'S IN LATIN AMERICA

A SILENT REVOLUTION

A SILENT

REVOLUTION Over the next decade the largest Latin American fortunes will pass to a younger generation. This transition will transform the way business is run in the region. Who will be the successors? How will the new leaders differ from their forefathers?

MAY / JUNE 2013

PLUS: A Bright Future for the Pacific Alliance

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CONTENTS

M AY / J U N E 2 0 1 3

VO L . 2 1 N o . 3

22 Features 14 Trends: The Multilatina Index Food hits the high spots

16 Logistics: Ocean Transport Ocean freight rates on the rise

20 Trade: The Pacific Alliance Market-friendly integration

22 Cover Story: Dynasties’ Silent Revolution 30 Investments: Nationalizations The pain in Spain

32 Finance: Private Equity The super buyers

36 Business: Health Services Healthcare: The North eyes South

Special Reports: Trade Americas 38 Small spells strong for U.S. businesses 44 Small-scale diplomacy 46 Insurance Steady goes it

50 Hospitality Turning on the taps

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LATIN TRADE

MAY-JUNE 2013

16 Industry Report: Tourism 48 Chinese gold

Country Report: Brazil 54 Roaring again. The Latin giant bounces back.


CONTENTS

M AY / J U N E 2 0 1 3

VO L . 2 1 N o . 3

Editor’s Note 6 A changing of the guard

The Scene 10 What will happen if the cycle crashes?

Opinion 12 The Contrarian: Latin America’s Brave New Demographics By John Price

Policy Agenda 60 Time to spend

Tech Trends

60

64 Latin America techs up

Events 66-67 BRAVO Councils: Lima/Panama 68-70 CFO Events: Sao Paulo/Buenos Aires

Spotlight The Duster Walkers 72 How to liven a Renault

Web Find us online at www.latintrade.com

Cover: A Silent Revolution

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LATIN TRADE

MAY-JUNE 2013

64 72


EDITOR’S LETTER

W

e are beginning to witness a rare event that will transform the history of Latin American business. Largely unnoticed, the leaders of top corporations are being replaced by a younger generation: the patriarchs of the largest familyowned groups are handing over the torch to their heirs. The succession does not, in general, present a major problem. Most families have been preparing for it for at least a decade. They have family protocols that will ensure seamless, or at least quarrelfree, transitions. But, the interesting element is that the newcomers have a different mindset than that of the old guard. Most of them have been trained at U.S. business schools. They have traveled extensively and met

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LATIN TRADE MAY-JUNE 2013

with customers, competitors and peers across many international borders. They tend to be more sensitive to social and environmental issues that relate to their business operations. They are also highly literate in international financial operations, and are less attached to their assets and more attracted by their returns. They will also be more open to sharing control of their firms with private or public equity holders. This phenomenon would perhaps merit only a short note in a management publication were it not that this group of executives will manage assets valued at close to $480 billion. That is a figure equivalent to the gross domestic product of Argentina. Without any exaggeration, the decisions of the new guard will shape the

Santiago Gutiérrez, Executive Editor sgutierrez@latintrade.com

©ISTOCKPHOTO.COM/ LEONTURA

A CHANGING OF THE GUARD

performance of the region’s economies. One concern is that these business leaders will become sophisticated asset managers. Under this hypothesis, they would place their holdings in large investment funds and drift away from their original industrial activities. This might generate a new source of volatility in the region; owners could be willing to sell-off their companies and acquire new ones, while multilatinas could be relocated to other parts of the world. As the new heads of the large Latin corporations specialize in portfolio management, there could also be a loss of regional skills in certain industries. Of course, efficiency is not an enemy of prosperity and perhaps such models could also ensure fast growth and the sustainability of enterprises and their home-base countries. But of course, the story could be written in a different way, as heirs such as André Gerdau in Brazil or Lorenzo Mendoza in Venezuela have shown. They have maintained the courses of their family businesses close to their original industries. No matter the strategy, the transition will undoubtedly shape the way business will be run in the region for the next two decades. That is why we at Latin Trade want to call the attention of our readers to this crucial aspect of business. As our cover story states, this is a silent revolution that will not only change the faces of the people at the helm of the largest conglomerates, but also the roots of the regional business environment. It will not be a minor adjustment.


ENERO-FEBRERO 2013 LATIN TRADE

7


LATIN BUSINESS CHRONICLE

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JANUARY-FEBRUARY 2013 LATIN TRADE

9


THE SCENE

What will happen if the cycle crashes? Which country will be damaged most if the price of basic goods falls?

there was a noteworthy convergence in the values of the index throughout the world, chiefly because of important advances in the emerging world, even though progress was uneven both within the regions and among them. For Latin America, it shows that since 2000, in contrast to overall worldwide trends, while income inequality has been reduced, its distribution continues to be the most unequal on the entire planet.

I

n its 2013 macroeconomic report on Latin America and the Caribbean, the Inter-American Development Bank estimates the impact on incomes as a potential percentage of gross domestic product for Latin American countries in the event of a 25 percent reduction in the prices of primary goods. Under the title “Rethinking Reforms: How Latin America and the Caribbean Can Escape Suppressed World Growth,” the report estimates that the biggest loser would be Ecuador, with a fall of 4.5 percent in its GDP potential, followed by Bolivia, where it would drop by 3.8 percent. Venezuela and Mexico would end up with sizable reductions in their GDP potentials, 2 percent for Mexico, and 3 percent for Venezuela, while Chile and Peru would see their GDP potential decline by 1 to 1.5 percent. Argentina and Colombia would be the least affected countries in the region in this scenario, with a dip in GDP potential of about 0.5 percent.

LATIN AMERICA SHOWS THE BEST HDI OF ALL EMERGING MARKETS AND DESPITE LOSING GROUND, THIS WILL CONTINUE TO BE TRUE IN 2050

ESTIMATED LOSS ON TOTAL REVENUES AS A RESULT OF A 25 PERCENT DROP IN REAL PRICES OF PRIMARY PRODUCTS

Source: United Nations, Human Development Report 2013; Pardee Center for International Futures 2013.

Little financial depth The financial depth indicators in Latin America show stagnant financing. Source: IDB, 2013 Latin American and Caribbean Macroeconomic Report

Inequality has been reduced, but not enough. The report on human development shows that the region is the world’s most unequal.

T

he latest edition of the Report on Human Development of the United Nations Development Program is titled “The ascent of the South.” This year, it shows that in the last 10 years all countries improved their achievements in education, health and income, according to the criteria that measure the human development index. It also notes that

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LATIN TRADE MAY-JUNE 2013

A

ccording to Financial Globalization, a report on global capital markets published by the McKinsey Global Institute, the growth of financial assets has stalled as a result of deleveraging by the banks and their customers in the years following the economic crisis. The news is even worse for the economies of Latin America: in general, the growth of financial assets in emerging markets has been below the growth of GDP in recent years and has accentuated the divergence in financial depth of these markets compared to the more advanced countries. In particular, the Latin American countries today show financial depth inferior to that of the other emerging regions, with the exception of Central and Eastern Europe and the Commonwealth states.


THE SCENE

LATIN AMERICA HAS ONE OF THE WORST FINANCIAL-DEPTH INDICATORS IN THE WORLD

Who likes public-private projects? Chile and Brazil are the countries most inclined to make alliances with private sector groups. Argentina and Venezuela are the least interested.

I

Central and Eastern Europe and the Commonwealth independent states. Source: McKinsey Global Institute Financial Assets Database. McKinsey Global Institute analysis.

Obesity. Alarm bells! Latin America is seen as the emerging region most affected by obesity, a trend that will only get worse in the years ahead.

n assessing the environment for public-private projects in Latin America and the Caribbean, it was found that the lack of infrastructure in Latin America and the Caribbean continues to be at the top of the political agenda in the region. That is the conclusion of Infrascope 2012, a recent study by the Economist Intelligence Unit for the Multilateral Investment Fund, which assesses the capacity of countries in Latin America and the Caribbean to establish public-private projects during the period December 2011-July 2012. Whether driven by external factors, such as the world sporting events that will be celebrated in Brazil, or internal factors, such as the infrastructure deficit emphasized by governments in such countries as Colombia or Costa Rica, the needs are pressing. This is due to reasons that range from the urgency to improve export competitiveness in Ecuador to modernizing transportation in the Dominican Republic. They have enabled the development of a form of consensus about the importance of private investment for the development of infrastructure in Latin America.

RANKING OF THE ENVIRONMENT QUALITY FOR PPP PROJECTS

B

eing overweight and being obese have evolved into a global epidemic. Despite high and volatile food prices, Latin America, surprisingly, has not escaped this reality. According to the latest report of the World Bank’s Food Price Watch, the region is in a worse situation than other emerging countries with respect to this indicator. Projecting the growth of obesity, it estimates that there will be triple the number of obese people in 2030 compared with 2005, rising from 60 million obese people to 191 million. Brazil and Mexico are the most alarming cases, since they are in sixth and seventh place, respectively, in the group of nine countries in which half of the world’s obese people are found (together with China, the United States, Germany, India, Russia, Indonesia and Turkey). The list shows at a glance that obesity is no longer a problem confined to the rich countries.

LATIN AMERICA HAS THE WORST SCENARIOS OF OBESITY FOR COUNTRIES IN EMERGING REGIONS BY 2030.

Note: The index measures the positions of the countries based on the weighted sum of the results of six categories and ranks countries on a scale from 0 to 100, where 100 represents the ideal environment for PPP projects. Source: Infrascope 2012. Source: The World Bank, Food Price Watch, March 2013.

MAY-JUNE 2013 LATIN TRADE

11


THE CONTRARIAN

CHANGING HOUSEHOLD STRUCTURE

LATIN AMERICA’S

BRAVE NEW DEMOGRAPHICS

BY JOHN PRICE

L

atin America is about to reap a generation of demographic dividend thanks to plunging fertility rates, which in Brazil, Chile and Mexico are below the replacement rate of 2.1. From 2000 to 2020, the percentage of working age Latin Americans (16-65) is projected to rise from 42 to 53 percent. That will deliver an economic boost akin to dropping unemployment from 15 to 4 percent. When societies have fewer children, households can rise above the economic burden of feeding, clothing and educating the young.

Having fewer children frees time up for mothers to pursue employment or start a business. Discretionary spending soars in such a household and a demographic dividend is born. It lasts for 30-40 years, until those fewer children must support their aging parents. From 2010 to 2020, the number of working age Latin Americans will grow by 41 million people, while the number of children under 15 will actually shrink by about 11 million. There will be less demand for schools and more demand for discretionary spending items like computers,

Population by age groups in Latin America for 2010 and 2020

2010

2020 60+ 83 mi

57 mi

25 - 59 296 mi

255 mi

15 - 24 105 mi

104 mi

0 - 14 160 mi

149 mi

SOURCE: AMI based on information of the Eclac* (Economic Commission for Latin America and the Caribbean)

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LATIN TRADE MAY-JUNE 2013

As Latin American society grows up, it is also breaking many of its stereotypical molds. Young Latin Americans, especially college graduates, are waiting longer to marry often till their early 30s. Households of young adults living alone, or with other unmarried friends, is one of the fastest growing segments in modern Latin America. An even faster growing segment is “empty nesters,” older adults who have shed their home of independence-seeking children. Instead of moving in with children and grandchildren, the better off classes of elderly Latin Americans are increasingly choosing to move into a smaller dwelling on their own. Other social taboos are rocking Latin American society and reshaping the household landscape. In the 1970s, only 20-25 percent of children were birthed by unmarried mothers. Today, the figure is closer to 60 percent, higher than any region in the world. In the more socially conservative societies of Chile, Peru and Colombia, the figure is more than 70 percent, according to a groundbreaking study by the Social Trends Institute. While in post-modern societies like Sweden or Canada, unmarried mothers are likely to cohabitate with their partner, in Latin America, most unmarried mothers live either with their parents, friends or alone, not with a spouse. The reasons for this trend are worrisome, stemming mostly from absent fathers, young men migrating to another country to work, or fathers killed in gang violence,

especially in Central America. The declining role of church in Latin American society is one of the factors behind the region’s abandonment of old social mores. Church attendance in Argentina, Chile, Uruguay, and Brazil is now below that of the comparatively secular Canada. A less socially and religiously conservative Latin America not only tolerates higher percentages of divorce and birth out of wedlock, it also increasingly encourages gays and lesbians to feel comfortable and accepted. Indeed, one of the fastest growing, though still small, household structures, is that of gay and lesbian couples cohabitating. With no kids to support, their disposable incomes are the targets of a growing number of marketers.

NEW MEDIA Media channels are rapidly changing in Latin America. 2012 marks the first year that more Latin Americans are members of Facebook than they are readers of newspapers. Young Latin Americans have little faith in the veracity of traditional media. Bombarded with marketing messaging in a less regulated media landscape, Latin American consumers are increasingly immune to conventional branding approaches. Instead, these young consumers want third-party validation of brands and products published in social media by their friends, not an ad agency. It’s a brave new world in Latin America. Marketers beware. John Price is the managing director of Americas Market Intelligence and a 20-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com

PHOTO: ©ISTOCKPHOTO.COM/ ANIL YANIK

cars and travel. Car ownership in Latin America, which was enjoyed by only 3 percent of Latin households in 1990 will penetrate 25 percent of households by 2020. An era of consumption is about to begin.


THE CONTRARIAN


TRENDS: THE MULTILATINA INDEX

Carrefour in Colombia.

FOOD

hits the high spots Sales from the retail, food and beverage sectors experienced double-digit growth last year, but oil companies suffered, according to Latin Business Chronicle’s Multilatinas Index.

L

ed by growth in retail and the food and beverage industry, the 25 companies that comprise the Latin Business Chronicle Multilatina Index posted $498.3 billion revenue in 2012, or 4 percent more than the previous year. This is an outstanding outcome considering the difficult environment that Latin America faced in 2012. Economic growth receded amid uncertainty brought about by the fiscal problems in the United States, the crisis in the European Union, and a slowdown in China. The multilatinas operating in extractive industries and in the production of primary goods continued to account for a 48 percent lion’s share of the total revenue of the 25 companies of the LBC Index. Producers of food and beverages accounted for 22 percent. In terms of countries, Brazilian and Mexican multilatinas accounted for 83 percent of revenue, Chile for 13 percent, and the remainder was sourced in Argentina, Colombia and Peru. In general, multilatinas are expected to perform better this year, thanks to relatively more favorable conditions for the region. Several of the companies will also continue to expand through joint ventures and acquisitions that could reach beyond the Americas — some of them aim to penetrate Asian markets.

THE WINNERS Last year, the revenues of the biggest retail chains grew by 28 percent, reflecting its dynamic role within the LBC index. Chile’s Cencosud grew in line with its aggressive expansion plan, based on acquisitions throughout the region. These included the addition of 31 new supermarkets from Prezunic in Brazil and 39 department stores from the acquisition of Chile’s Johnson chain. Cencosud’s sales are expected to expand this year at a similar pace on the back of the contribution of its recent acquisition of the assets of French company Carrefour in Colombia, which will add 100 stores, and of GBarbosa in Brazil, with 46 stores. In turn, Fallabella has publicly revealed that it aims to continue growing this year, not only through regular expansion, but also by potential mergers. In 2012, this Chilean multilatina opened 37 new stores and three shopping malls in the four markets where it operates — Chile,

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LATIN TRADE MAY-JUNE 2013

Peru, Argentina and Colombia. Fallabella is planning to open 42 stores and four malls in 2013, when it forecasts double-digit growth of revenue, supported by the financial activity of Banco Fallabella. The Multilatina Index shows that the food and beverage sector was yet another winner in 2012, after growing by 15 percent, boosted by the strength of domestic markets in the region. Grupo Bimbo’s revenue increased significantly, reflecting the integration with Sarah Lee in the United States (where sales volumes recovered last year), as well as the rapid growth of markets in Chile and Colombia. Outstanding revenue growth is the hallmark of Colombia’s Grupo Nutresa and Peru’s Alicorp. In 2013, these two companies will also remain active in acquisitions. Already, Nutresa has widened its portfolio in Central America’s ice-cream segment and penetrated the confectionary market in Malaysia. Alicorp is expected to break into the huge Brazilian market. In beverages, Femsa — whose revenue increased notably in 2012 on the back of double-digit growth of consumption in Latin America — expects to maintain the same pace this year while the trend continues and recent new businesses consolidate, including the purchase of the Ysa pharmacy chain in Mexico, and a bottler in the Philippines. The increase in per-capita beer consumption in the region, as well as in China and Japan, boosted the revenue of Grupo Modelo, which in the short term is focusing on its forthcoming full absorption by the Belgian-Brazilian group InBev.

ASPIRATIONS FOR 2013 The index for extractive industries and primary goods emerges as the underachiever for 2012, when it declined by 6.3 percent compared with 2011. The decline included significant drops in revenue, such as that of Vale, which was chiefly a reflection of plummeting world prices for iron ore. The same trend also affected the revenues of other steelmakers in Brazil, such as CSN and Gerdau, although the vitality of the Brazilian market became the cornerstone for the expansion of their domestic sales in 2012. The strength of the construction sector in Brazil is expected to grow, thanks not only to the public works associated with the 2014 FIFA

PHOTO: ARCHIVO EL TIEMPO/EL TIEMPO DE COLOMBIA/NEWSCOM

BY DAVID RAMÍREZ


TRENDS: THE MULTILATINA INDEX

Multilatina Index (2012) Income in millions of U.S. Dollars Total Income 2012

Total Income 2011

$144,103

$145,915

2 América Móvil, Mexico

$59,575

3 Vale, Brazil

$46,454

4 Grupo JBS, Brazil

Company 1 Petrobras, Brazil

Var %

Domestic

International

Income

Income †

2012

2012

Sector

-1.2%

$126,174

12.4%

oil

$52,281

14.0%

$20,830

65.0%

telecoms

$60,389

-23.1%

$9,125

80.4%

mining

$37,034

$32,871

12.7%

$8,813

76.2%

food

5 Cencosud, Chile

$19,062

$14,647

30.1%

$7,631

60.0%

retail

6 Gerdau, Brazil

$18,582

$18,834

-1.3%

$6,898

62.9%

steel

7 Femsa, Mexico

$18,317

$14,406

27.2%

$11,275

38.4%

beverages

8 Grupo Alfa, Mexico

$15,152

$14,746

2.8%

$5,767

61.9%

petrochemicals, electronics

9 Cemex, Mexico

$14,984

$15,215

-1.5%

$3,377

77.5%

cement

10 Brasil Foods, Brazil

$13,952

$13,673

2.0%

$8,155

41.6%

food

11 Grupo Bimbo, Mexico

$13,308

$9,543

39.5%

$5,418

59.3%

food

12 Falabella, Chile

$12,309

$9,908

24.2%

$7,534

38.8%

retail

13 Marfrig, Brazil

$11,608

$11,178

3.8%

$6,064

47.8%

food

14 Tenaris, Argentina

$10,834

$9,973

8.6%

N/A

N/A

steel

15 Grupo Mexico, Mx

$10,183

$10,443

-2.5%

$3,934

61.4%

oil and mining

16 LATAM, Chile *

$9,942

$5,718

73.9%

$1,525

84.7%

air transport

17 CSN, Brazil

$8,266

$8,787

-5.9%

$5,135

37.9%

steel

18 Grupo Modelo, Mexico

$7,632

$6,505

17.3%

$3,968

48.0%

beverages

19 Embraer, Brazil

$6,178

$5,803

6.5%

$868

85.9%

air transport

20 Grupo Televisa, Mexico

$5,326

$4,473

19.1%

$4,687

12.0%

media

21 CMPC, Chile

$4,759

$4,786

-0.6%

$1,209

74.6%

paper and pulp

22 Natura, Brazil

$3,105

$2,974

4.4%

$2,745

11.6%

personal care

23 Grupo Nutresa, Colombia

$3,001

$2,603

15.3%

$2,146

28.5%

food

24 Arcor, Argentina

$2,834

$2,818

0.5%

$2,400

15.3%

food food

25 Alicorp, Peru TOTAL AVERAGE

$1,754

$1,576

11.3%

$1,304

25.7%

$498,253

$480,065

3.8%

$256,981

N/A

$19,930

$19,203

3.8%

$10,708

1.9%

Notes: † Percentage of total income. * New company resulting from the merger of LAN and TAM. SOURCE: Companies, Latin Business Chronicle, an affiliate of the Latin Trade Group. www.latinbusinesschronicle.com

World Cup and the 2016 Olympics, but also on account of the development of infrastructure mega-projects. As a result, makers of iron and steel products are expected to grow in 2013. Faster growth of the Chinese economy will also probably materialize in higher prices for basic goods, such as iron ore, steel and copper. That should help the recovery of revenue for companies that include Grupo México, which in 2012 experienced lower sales due to an adverse price environment. In contrast, the outlook for oil companies such as Petrobras does not

look promising given that experts are forecasting lower international oil prices for 2013. Nevertheless, prices will be sufficient to support the recent positive trend in exploration, principally in deep-water and nonconventional fields. In the case of Tenaris, this trend allowed it to obtain 9 percent revenue growth in 2012, supported in particular by the recovery of sales to the United States. This multilatina expects overall global economic growth to support its revenues 2013. David Ramírez reported from Miami.

MAY-JUNE 2013 LATIN TRADE

15


LOGISTICS: OCEAN TRANSPORT

OCEAN FREIGHT RATES

ON THE RISE

PHOTO: ©ISTOCKPHOTO.COM /DAN BARNES

Rates for marine cargo could increase as much as 18 percent in South America’s east coast routes in the upcoming months.

BY REBECA FERNÁNDEZ

I

n the next year, ocean freight rates may increase, as the effects of the 2009 financial crisis and the industry’s overcapacity stop pushing down the prices at the maritime transport market. In an interview with Latin Trade, chief analyst at the Infrastructure Services Unit of the UN Economic Commission for Latin America and the Caribbean (Eclac), Ricardo Sánchez, predicted a small but significant recovery in the value of ocean

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LATIN TRADE MAY-JUNE 2013

freight rates, especially in the continent’s east coast routes. Sanchez expects rates to increase gradually over the year, to stabilize at the beginning of the last trimester of 2013, and then to rise again at the beginning of 2014. “The revaluation of currencies in the continent will considerably drive up trade in the region; I will say around 7 percent on imports and 6.5 percent on exports. This will have an impact on


LOGISTICS: OCEAN TRANSPORT

Containers stack up on the deck of the freight ship in the port of Valparaiso, Chile.

“Container ships with a capacity of more than 9,000 TEUs will become

on ocean freight rates, which could result in an increase of 18 percent in South America’s east coast routes,” says Sánchez. Such recuperation would set prices almost at the same level they were in November 2012, before they tumbled 25 percent. According to Sánchez, the upturn should be credited to the route’s characteristic dynamism, as well as the incursion of container shipping companies into the reefer business. However, these factors alone will not contribute to the predicted rise. After a 2011 price war caused freight rates to fall precipitously, maritime companies have changed their business strategy to one that allows them to make profit and not just gain market share. General Rate Increases (GRIs) have been implemented by different shipping companies in order to restore the freight rates levels that had dropped drastically in 2009 and 2011. “Rates in 2012 were still very low and had become unsustainable

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LATIN TRADE MAY-JUNE 2013

for the industry,” says Michel Donner, senior advisor of Drewry Consultants, which specializes in ports and shipping. Donner expects more attempts to implement GRIs this year. There is also the issue of rising bunker prices and their positive effect on the rise of rates. “While particularly hard to predict, it is expected that bunker surcharges should remain within a few percentage points of the 2011 levels,” adds Donner. To reduce the industry’s overcapacity, shipping lines are taking measures such as scrapping older vessels and introducing new ones with more capacity. They are also reducing their navigation speeds to save on bunkers and increasing the number of ships serving a route. Additionally, they have entered new service alliances to idle more ships on each of their fleets. Of these strategies, the introduction of ships with more capacity to the region’s routes could impact ocean freight rates

negatively, say the specialists consulted by Latin Trade. “Container ships with a capacity of more than 9,000 TEUs will become the new standard in Latin American routes, and this could put a limit in the increment of freight rates,” says Sánchez. Donner refused to be deterministic about the consequences, but conceded that if in the next couple of years Latin America upgrades its infrastructure to efficiently serve these types of vessels, trade could increase dramatically in the region. Reports published at the beginning of March by ocean freight carriers Panalpina, CMA CGM, and Hapag-Lloyd stated that 2013 would be a year of positive, yet limited, recovery in freight rates due to uncertainty of the global economy. If trends described by industry insiders and experts hold up, 2013 could be the year the maritime industry finally navigates away from a four-year market lull. Rebeca Fernández reported from Detroit.

PHOTO: ©ISTOCKPHOTO.COM /MIRALEX

the new standard in Latin American routes, and this could put a limit in the increment of freight rates.” Ricardo Sánchez, chief analyst at the Infrastructure Services Unit of UN Eclac


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TRADE: THE PACIFIC ALLIANCE

Mexican President Enrique Peña Nieto, Colombia’s President Juan Manuel Santos, Chile’s President Sebastián Piñera and Peruvian President Ollanta Humala (from L to R) at a news conference after the Community of Latin American and Caribbean States (Celac) Summit in Santiago, Chile.

MARKET-FRIENDLY INTEGRATION While the Pacific Alliance involving Mexico, Chile, Colombia and Peru has gotten off to a good start, many observers say that grounds for skepticism remain. Will the member countries’ pragmatic, market-friendly approach make the difference?

T

he launch of the Pacific Alliance last year revived hopes that a Latin American project may finally be successful in promoting economic integration and free trade, while deepening ties with China and other fast-growing Asian countries. But though the four-country alliance has gotten off to a good start, many observers say there are still grounds for skepticism. Other Latin American integration efforts have met obstacles despite starting off with similar optimism. Mercosur was formed more than 20 years ago as an ambitious project to create a common market of Argentina, Brazil, Paraguay and Uruguay. Today, analysts believe that Mercosur, which now also includes Venezuela, is at risk of breaking up partially due to increased protectionism. Authorities from Chile, Colombia, Mexico and Peru – the members of the Pacific Alliance – are confident that their initiative will be different. Their optimism is largely based on the Pacific Alliance’s strong foundation. Unlike some of their Latin American neighbors, the four countries have been firm proponents of market-friendly policies, with each one signing several free trade agreements prior to the Pacific Alliance. Chile, Colombia, Mexico and Peru have also

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had good compliance records for international commitments in recent years. “It is an important signal to Latin America, in the sense that regional integration and open markets are the best way to ensure greater volumes of investment, trade, and growth,” the Colombian trade minister, Sergio Diaz-Granados, said last year after the alliance was officially created. In addition, the Pacific Alliance’s immediate objectives are more modest than other regional integration efforts. In January, the countries eliminated 90 percent of the tariff s on goods traded among their countries. They have a plan to lift visa requirements in order to facilitate travel, and create an exchange program for university students. Chile, Colombia and Peru have integrated their stock markets, while the Mexican Stock Exchange is expected to join them soon. “The Pacific Alliance strikes me as more encouraging,” said Michael Shifter, the president of the Inter-American Dialogue, a think tank. “They are trying to build a strong integration foundation around very concrete, clear steps and then take it to a higher level.”

PHOTO: AGENCIA UNO/XINHUA/SIPA USA

BY RYAN DUBE


TRADE: THE PACIFIC ALLIANCE

PHOTO: FELIPE TRUEBA; ILLUSTRATION: STAFF/MCT/NEWSCOM

The main opportunity for the Pacific Alliance will come later on as it pursues its more ambitious objective of boosting commercial ties with Asia. The countries could look to strike a free trade agreement with regional groups like the Association of Southeast Asian Nations. Asean, as the group is known, is made up of 10 countries, including Indonesia, Singapore and Vietnam. The Pacific Alliance countries will enhance their bargaining leverage by negotiating as a bloc, rather than on their own. Together, the four countries account for about 35 percent of Latin America’s gross domestic product and half of the region’s total exports. However, in order to be successful, the members of the Pacific Alliance will need to give more authority to its council of ministers in order to manage negotiations, said Gian Luca Gardini, a professor of international relations and Latin American politics at the University of Bath. “The future impact of the Pacific Alliance is really dependent on the extent and consistency of the members’ commitment to it,” he said. While the benefit of negotiating as a group with Asia is one of the Pacific Alliance’s main opportunities, it may also be its biggest challenge. Even though the countries are businessfriendly and open to trade, they could have different interests when it comes time to negotiate due to differences in their economies. For example, Mexico has a vibrant manufacturing export sector, which is lacking in its three South American partners whose economies are heavily dependent on natural resources. “That puts Mexico in a different position in terms of negotiating deals,” said Shifter. “That is when differences could be exposed that are perhaps not as clear today.” Ryan Dube reported from Lima.

Facts about the

PACIFIC ALLIANCE • The Pacific Alliance has a population of 210 million. It is equivalent to the fifth largest in the world and it is close to 35 percent of the total Latin American and The Caribbean population (603 million). • The combined GDP of the Pacific Alliance countries would make it the ninth largest economy in the world. It is also equivalent to 35 percent of the total Latin American and The Caribbean GDP. • Economic growth rate for the combined Pacific Alliance countries was 5 percent in 2012. This is 1.9 percentage points higher than Latin America´s average rate, and 2.8 percentage points higher than the world’s 2012 growth rate. • GDP per capita is close to $13,000. • Unemplyoment rate is 7.6 percent. • Inflation rate stands at 3.2 percent, lower than the 6 percent regional average in 2012.

General view of the 4th Summit of the Pacific Alliance at the European Southern Observatory in Cerro Paranal, Antofagasta (Chile).

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COVER FEATURE

Luis Carlos Sarmiento

THE LARGEST FORTUNES

Carlos Slim

ynasties

SILENT Over the next decade, the largest fortunes in Latin America will be passed on to a younger generation. The transition will transform the way in which business is run in the region. Who will be the successors? And, how will the new leaders differ from their forefathers? BY GIDEON LONG

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exico’s Carlos Slim, the world’s richest man, is 73 and will one day inevitably pass control of his business empire to younger men. His sons, Carlos, Marco Antonio and Patrick, already manage parts of it. In Argentina, the country’s third richest man, Gregorio Pérez Companc, is in his late seventies and reported to be in frail health. In recent years, he has gifted parts of his energy and agriculture conglomerate to his wife and seven children. Colombia’s richest man, Luis Carlos Sarmiento, turned 80 this year and is handing the reins of the family-owned banking conglomerate, Grupo Aval, to his eldest son, Luis Carlos Jr. The upper echelons of the Brazilian business world are packed with septuagenarians. The country’s richest man (according to Forbes) is Jorge Paulo Lemann, who holds a controlling stake in the world’s largest beer company, Anheuser-Busch. He is 73. Brazil’s second-richest man, Joseph Safra of the Safra banking and investment group, is also in his seventies. Retail magnate Abilio dos Santos Diniz is 76. And the granddaddy of them all, Aloysio de Andrade Faria, is in his nineties. Listed by Forbes as Brazil’s 15th richest man, he is mostly retired these days, having helped build one of the nation’s largest banking empires. Over the next decade or so, these men, and many like them,

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will pass the baton of power to a younger generation. Who will they choose as their successors? How smooth will the transition be? And how will the new, younger men — and increasingly women — differ from their forefathers? The answers to these questions will help shape the future of business in Latin America for years to come. “We’re in the middle of a big generational transition,” says John Davis, a professor at Harvard and chairman of Cambridge Advisors to Family Enterprise, a U.S.-based consultancy that has advised scores of family-owned Latin American companies on their succession plans. “Hundreds of thousands of companies are transitioning as we speak, or at least they should be.”

SLEEPLESS NIGHTS Many business leaders in the region are already addressing these issues. Last year, Alair Martins, founder of Brazilian wholesaler Grupo Martins, signed an agreement to pass control of his company to his three sons. When he did, he said a weight was lifted from his shoulders. “I lost many nights of sleep over this,” Martins told Brazilian business newspaper Valor Econômico. “Over the last four of five years I’ve been thinking about it more and more. I’m already 78, I’m healthy and I love what I do, but I

PHOTOS: SLIM DOMIT: ALEX GORT PRODUCTIONS; SLIM: BLOOMBERG VIA GETTY IMAGES; SARMIENTO: CLAUDIA RUBIO/EL TIEMPO DE COLOMBIA/NEWSCOM

Carlos Slim Domit


COVER FEATURE

PHOTOS: SANTOS DINIZ: LATINCONTENT/GETTY IMAGES; GERDAU: NACHO DOCE/REU TERS/NEWSCOM; PAULMANN: BLOOMBERG VIA GETTY IMAGES

NEW LEADERS André Gerdau Abilio dos Santos Diniz

BIG BUSINESS Horst Paulmann

REVOLUTION have to be realistic. I’m not going to be here forever.” Others are less well prepared. A survey by accountancy firm Price WaterhouseCoopers in 2010 showed that 55 percent of Brazilian companies had a plan in place for dealing with a succession crisis, such as the sudden resignation or death of a key manager, for example. Only 12 percent, however, had such a plan for all senior roles. The survey found that 36 percent of family-owned businesses in emerging markets, including Latin America, expect a leadership transition within the next five years. More than half of the Brazilian business leaders interviewed acknowledged that their families sometimes quarreled about the future direction of the business. So, do the owners and heirs of the great Latin American fortunes take this issue seriously enough? “The answer, quite definitely, is ‘no’,” says Gonzalo Jiménez, executive chairman of Proteus Management Consulting, a Chilean-based firm that has helped design succession plans for many of the region’s companies. “Fathers always have a solution in mind for their succession plan. But there’s a big difference between that and actually working seriously on a plan.” Not only families should worry about this issue. It is also a concern for investors. After all, who wants to plough money into a company that might implode due to an unforeseen family argument? Last year, ratings agency Moody’s published a report on succession planning in Latin America, describing it as “an important credit consideration.” The report’s author, Christian Plath, says he recalls several meetings at Moody’s in which ana-

lysts considered upgrading a company’s credit rating but finally decided to keep it on hold due to concerns about succession. “We need to feel comfortable with these issues before we bump up a company to investment grade,” Plath told Latin Trade. In many ways, the issue of succession is even more important in Latin America than in the United States or Europe because more companies there are family-owned. Jon Martínez, a business professor and expert in this field at the University of the Andes in Chile, estimates than between 70 and 90 percent of companies in the region are family-controlled; among big corporations, the figure is about 60 to 70 percent. That compares to approximately a third of the corporations on the S&P 500 index in the United States and half of the leading companies in Europe.

DEATH AND TAXES “In this world nothing can be said to be certain, except death and taxes.” So wrote Benjamin Franklin in 1789 and it holds true today. Companies need to prepare for the worst. Chile’s wealthiest family, the Luksics, were given an all-toopainful reminder of this in March, when Guillermo Luksic, one of three brothers who inherited the family empire from their father Andrónico, died of lung cancer at age 57. Guillermo was chairman of the industrial and financial services conglomerate Quiñenco for more than 30 years. His eldest son Nicolás has assumed his father’s seat on the Quiñenco board. Nicolás is only 34 and has only a fraction of his father’s experience, but observers say the family had primed him well. He has

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COVER FEATURE

Nelson and Eduardo Sirotsky

worked for most of the past decade in various branches of the family empire, is the chief executive of Ionix, a Chilean IT company, and has worked abroad, as a product manager at Heineken and a financial analyst at AXA Investment in Paris. “It’s often a good idea for heirs to get experience outside their family companies and then come back to the family later in their careers,” says Jon Martínez. Martínez recalls another example of a death that had the potential to destabilize a family business. In 2001, he was advising the Feffer family in Brazil, who made their fortune from wood pulp and petrochemicals. Suddenly, the head of the family, Max Feffer, died of a heart attack, at age 74. “Thankfully, we’d worked on a family constitution,” Martínez remembers. “When Max died, his eldest son David, helped by his brother Daniel, managed the process incredibly well, preventing any disruption to the business.” A decade later, David Feffer is still head of the family business.

PASSING THE BATON Some Latin American families have never had to face a succession from one generation to the next. They include the Paul-

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mann family, owners of Cencosud, a Chilean retail colossus with interests in Argentina, Brazil, Colombia and Peru. Horst Paulmann built the company from scratch after arriving in Chile as a German immigrant after World War II. He is still very much the head of the business and a formidable personality. He is reported to have had a fractious relationship with his eldest son Manfred, who resigned from the Cencosud board in 2010 after little more than a year as company vice-president. Analysts say that first-generation handovers, such as the one the Paulmanns face, can be problematic because the founder of the company, having built it from nothing, is often reluctant to relinquish power. In its report last year, Moody’s cited Cencosud’s succession plans as a concern. It is not entirely clear to outsiders who will lead the company when Horst Paulmann retires or passes away. Older, more established companies face different issues. Take the Gerdau dynasty in Brazil. It was founded in 1901 by João Gerdau, a farmer who emigrated to Brazil from Prussia in 1869, and is now the biggest steel producer in Latin America. The current chief executive, André Gerdau, is a fifth-generation leader. The Gerdaus, unlike the Paulmanns, have plenty of expe-

PHOTO: RBS MEDIA

The Sirotsky family in Brazil as one in which succession has been “beautifully managed,” according to John Davis from Harvard.


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COVER FEATURE

Eduardo Sirotsky having an internal meeting with employees.

rience of passing the baton from one generation to the next, but the problem is that the family grows larger with each generation. When André’s father Jorge handed him the chief executive job in 2007, he had to choose from an enormous pool of sons, daughters and cousins, some of whom were arguably as wellqualified for the post as André. Managing inter-family rivalries is therefore of utmost importance in large, long-established family firms. Ultimately, much comes down to personality. A first-generation founder of a company like Horst Paulmann has to be a very different character from a fifth-generation leader such as André Gerdau. “When you’re the founder you can do what you want but when you’re the owner of 20 percent of the firm, or 10 percent, you can’t,” says Jon Martínez. “You have to be more political, more democratic, more flexible, more sensitive to family dynamics. Unfortunately, lots of sons don’t understand why they can’t run things the way their fathers did. You can’t become a little dictator. If you do, your siblings are likely to say, ‘Wait a minute, we already had one father, we don’t want another one’.”

THE GOOD, THE BAD AND THE UGLY John Davis at Harvard cites the Sirotsky family in Brazil as one in which succession has been “beautifully managed.” The fam-

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ily controls the RBS media company in Porto Alegre, founded in 1957 by Mauricio Sirotsky. When he died in 1986, the baton passed to his brother Jayme, then to Mauricio’s son Nelson and then, last year, to Nelson’s nephew Eduardo. “They’ve done a marvelous job of selecting and grooming a successor, with Eduardo moving from senior management to COO to CEO,” Davis says. Other observers cite the Gerdaus and the Von Appen family in Chile as families that have handled succession deftly. Other handovers have been less successful. In Chile, the death in 2005 of Hernán Briones sparked disagreements among his five children over the direction of the family business. In 2007, one of Hernán’s sons, Felipe, went his own way after reaching a deal with his siblings to maintain control of a salmon company, Yadrán. Then, last year, Felipe’s sisters Anita and Loreto parted company with their brothers Hernán and Pablo. They reached a cash-and-shares agreement that resolved differences but effectively meant the break-up of the Briones empire, which included cement company Bío Bío. The Claro Group is another Chilean conglomerate that pretty much fell apart after its chief shareholder Ricardo Claro died in 2008, without leaving children to inherit the business. The Bethia family bought Claro’s television channel, Mega, while the Luksic family took control of shipping company Vapores, once the jewel in Ricardo Claro’s crown.

PHOTO: RBS MEDIA/ ADRIANA FRANCIOSI

So where will the next big family transitions take place and who will emerge as the new company leaders in Latin America?


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MAY-JUNE 2013 LATIN TRADE

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COVER FEATURE

The other big change over the next decade or so is likely to be the emergence of female senior managers in Latin America. focused on business links with Asia than their fathers ever were, and perhaps less concerned with U.S. and European markets. So where will the next big family transitions take place and And, thanks to the internet and social networking, they will who will emerge as the new company leaders in Latin America? need to be more attuned to the demands of their customers than Gonzalo Jiménez at Proteus Management Consulting points to ever before. Peru as a country to watch. “There are a lot of Peruvian busiThe other big change over the next decade or so is likely to ness groups whose leaders are around 70 years old and we know be the emergence of female senior managers in Latin America. there’ll be succession handovers soon,” he says. One of the Although the region’s wealthy country’s biggest conglomerfamilies are still notoriates, the Romero Group, has ously patriarchal, changes are already begun what appears to emerging. Fathers no longer be a smooth transition from automatically assume that third-generation leader Ditheir eldest sons will step into onisio Romero, now 76, to his their shoes when they retire son, also called Dionisio. or die. The Brescias are another In Mexico, María Asunción Peruvian family to keep an eye Aramburuzabala has blazed on. Mario and Pedro Brescia a trail for women since she have controlled their fishing, took the reins in the 1990s of mining, agriculture, insurGrupo Modelo, the vast brewance, banking and cement ing company that makes the conglomerate for more than country’s best-known beer, half a century. Mario is now in Corona. Through the family his eighties and Pedro in his company Tresalia, she has ennineties. According to Forbes, hanced the fortune she inherthey have begun the transition ited from her father by exprocess, passing shareholdings panding into venture capital, to nephews and children. construction and real estate. In México, Alberto BailIn Chile, Pilar Zabala is lères, listed by Forbes as Adriana Cisneros is the obvious the head of the Pie de Monte, second to Carlos Slim in the successor to her father Gustavo Cisneros which owns more than 30 country’s wealth rankings, is as head of their family media empire. companies, ranging from olive 81 and still chairman of Gruoil producers to real-estate po Bal, a holding company for firms and restaurant chains. Pilar has a brother, but he chose the his mining, insurance and financial interests. His son Alejandro priesthood rather than work in the family business. So, when is tipped to succeed him. In Venezuela, Adriana Cisneros is the obvious successor to her their father José Luis died in 2006, Pilar stepped up to the plate, becoming one of only a handful of women in Chile to hold posifather Gustavo Cisneros as head of their family media empire tions of real power within large family-owned companies. (she is currently director of strategy) while in Colombia, AleOnly in April, Brazil’s richest woman, Dirce Navarro de Cajandro Santo Domingo is likely to emerge as one of the region’s margo, died at age 100. She was the world’s oldest billionaire, leading businessmen having inherited the family fortune from according to Forbes, and controlled Camargo Corrêa, a giant cehis father Julio, who died in 2011. Many of the region’s new, young leaders have studied at presment, real estate, construction and energy conglomerate. The famtigious business schools in the United States or Europe, a luxury ily empire is likely to pass to her daughters, Regina, Renata and many of their fathers never enjoyed. They speak good English Rosana, ensuring a female presence at the top of the company. – not always the case in previous generations. Observers say that Jon Martínez says Latin American patriarchs would be wise this should mean that Latin American firms adopt a more open, to consider their daughters when thinking about who should internationalist outlook than in the past. In companies that inherit their business empires. export goods and services, the new generation will be far more “Most fathers want to pass the baton to their eldest sons and

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PHOTO: ÁLVARO GARCÍA EL PAIS PHOTOS/NEWSCOM

TALKIN’ ’BOUT MY GENERATION


they often want those sons to be clones of themselves,” he says. “But in many cases, the eldest son takes after his mother, and it’s actually the eldest daughter who is more like the father in terms of personality. Quite often the eldest son is not the kind of guy who’s going to go out and conquer the world.”

María Asunción Aramburuzabala

FAMILY FLAME

the last letter, the instructions left to us by our father: to keep the family united. That is your great legacy and, at the same time, it’s the greatest challenge you leave to us.” Gideon Long reported from Santiago de Chile.

PHOTO: SAN ANTONIO EXPRESS-NEWS/ZUMAPRESS/NEWSCOM

As the Latin American business world evolves, many family companies will perish due to competition, poor management or other factors. Studies show that in Argentina and Brazil, 70 percent of family enterprises fail to survive into a second generation. In Chile, the average life of a family-owned company is little more than 30 years, and only 16 percent of them make it to the age of 50. Those that survive to a fourth or fifth generation, like the Gerdaus in Brazil, are exceptional. Across the region, business leaders are striving to keep their family flames alive. At his brother’s funeral in March, Chile’s Jean Paul Luksic, the head of mining company Antofagasta Minerals, gave an insight into the importance of that principle to those involved. In a eulogy to his dead brother he said: “Like a real perfectionist, you followed, right down to

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INVESTMENTS: NATIONALIZATIONS

Bolivian President Evo Morales announced the nationalization of Spanish airport management company Sabsa, after accusing the company of failing to make promised payments. Sabsa operates Bolivia’s three main airports. Soldiers were deployed to the airports to ensure the facilities continue operating.

YPF, Red Eléctrica, Sabsa — companies backed by Spanish capital — were expropriated in the past year in Latin America. Is a new wave of nationalism being aimed at Spain? BY SERGIO MANAUT

S

ome sectors of Madrid’s business community have been muttering with varying degrees of concern about the notion of harassment of Spain’s investments in Latin America. On February 18, the president of Bolivia, Evo Morales, set off alarm bells. Morales announced that he would expropriate Servicios de Aeropuertos Bolivianos, known as Sabsa, a subsidiary owned by Spain’s Abertis y Aena, which administers the country’s three largest airports. Under his watch, Morales has overseen about 20 nationalizations since 2006, when he decreed the expropriation of the hydrocarbons industry and concluded the gradual re-

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nationalizing of the subsidiaries of Yacimientos Petrolíferos Fiscales Bolivianos (Ypfb). The story of the government’s relationship with Spanish investments continued on May 1, 2012, when Morales nationalized Transportadora de Electricidad (TDE), a subsidiary of Red Eléctrica Española (REE). Then on December 29, he decreed the expropriation of two distributors of electricity in La Paz and Oruro, subsidaries of another Spanish company, Iberdrola. The decree also takes in a service company and an investment management firm. All the nationalizations were said to be based on a failure to comply with investment plans.

REAL HARASSMENT? How many years have passed since the arrival of the Spanish companies in the region? For those with good memories, it’s been almost 20 years. And in that time, what happened to transform the atmosphere from one of welcome with open arms to harassment? In truth, we should probably not even speak of harassment. “Harassment, no.” That is the categorical reply of Juan Carlos Martínez-Lázaro, director general of the corporate division of the IE Business School. The incidents were very individual situations in specific countries. “The Spanish companies had problems in

PHOTO: JORGE ABREGO/EPA/NEWSCOM

THE PAIN IN SPAIN

But, the nationalizations by the president of Bolivia were surpassed in severity by those of the Kirchners in Argentina. In addition to nationalizing Aerolíneas Argentinas from Marsans — now bankrupt, with its owner living in a Madrid prison — Argentina took over pension funds that included Bbva’s Consolidar. A year later, it surprised the world with the expropriation of Repsol’s 51 percent stake in the Argentine state oil company YPF, setting off a deep rift between Spain and Argentina. Repsol is accusing YPF in a case held before the World Bank’s International Center for Settlement of Investment Disputes (Icsid). Informed sources within Repsol told Latin Trade the indemnity Argentina would have to pay could be in the range of $10.5 billion, “without counting the cost in terms of prestige that will impede its search for an investment partner for the Vaca Muerta shale project.” Venezuela has also climbed onto the nationalization bandwagon. In July 2008, the late President Hugo Chávez announced a takeover of Banco de Venezuela, an affiliate of Spain’s Santander. Finally, more than a year later, Santander agreed to sell it to the Venezuelan state for $1.05 billion.


INVESTMENTS: NATIONALIZATIONS

“The problem isn’t that the companies are Spanish, but that these governments decided to expropriate certain companies.” Juan Carlos Martínez-Lázaro, director general of the corporate division of the IE Business School

PHOTO: DANIEL GARCIA/AFP/GETTY IMAGES/NEWSCOM

People celebrate during the plenary session to vote a bill nationalizing Argentine YPF oil company in Buenos Aires. The Argentine Congress voted the expropriation of the 51% of the bonds of YPF, the country’s largest oil company, from Spanish company Repsol.

Argentina and Bolivia, while Venezuela is a very complicated situation. The problem isn’t that the companies are Spanish, but that these governments decided to expropriate certain companies.” José Pin Arboledas, who occupies the chair of Government and Leadership in Public Administration at the IESE Business School, also thinks that you can’t say there’s a broad plan to harass Spanish companies. “However,” he adds, “the concurrence of various expropriations of companies in Argentina and Bolivia creates this impression in Spain. In any case, these expropriations coincide with countries with populist governments, in extractive or energy industries, and this supports the theory that both of these characteristics yield a higher probability of nationalization.” A contrarian, the Argentine consultant, Pablo Tigani, thinks that in general, the executives from Spain showed that they had not done much preparation before they launched their international expansion. “The decade of the nineties with corrupt or submissive governments has ended, and so too have easy business practices,” he says. “Added to that, it was not the moment for disinvestment and repatriation in Latin America. In Argentina, they assetstripped Aerolíneas and YPF, but Santander and Bbva are doing very well,” he says. In spite of everything, Tigani is convinced that this wave of nationalizing won’t last.

In a more subtle vein, Carlos Malamud, researcher for the Real Instituto Elcano, arrives at nearly the same conclusion as Tigani. He says, “It’s now day to day for the multinationals. They are part of a complex reality. What is happening is that the internationalization of our companies is relatively recent and we aren’t used to episodes of this type.” As things stand, in the head offices of the companies affected, there are also voices with a lot to say. Abertis, which owns 90 percent of the shares of Sabsa, was conciliatory with the Morales administration. “Our position with respect to the announcement of nationalizing Sabsa is that we respect the government’s decision, provided that this process is carried out in keeping with the principles of international law. Abertis has placed itself at the disposal of the Bolivian government to carry out the relevant negotiations and is confident that it will arrive at an agreement to get adequate compensation,” said a spokesman when asked by Latin Trade. Abertis not only denies the Bolivian government’s accusation that it has failed to comply with the investment plan, but it goes beyond that and says that Bolivia failed to comply with the rules applicable to tariffs for takeoff and landing services. They have been frozen since 2003, and were reduced arbitrarily in 2005. “Abertis made an important investment effort in its three airports in Bolivia,” the spokesman said. “Between 2005 and 2012, Sabsa invested

$12.6 million, as well as paying fees totaling $38.6 million, and another $9.4 million in taxes,” he said. Abertis confirms that due to the various failures of Bolivia to deliver on the concession contract, it is seeking compensation of $90 million. Iberdrola also reacted prudently. In order to move on, it will be demanding $100 million from the Bolivian government. The situation demands tolerance. The crisis that is devastating Spain means Latin America’s internal market has become the main attraction for Spanish companies hoping to invest. The Sixth Outlook Report on Spanish Investment in Latin America of the IE Business School states it clearly: 95 percent of the large Spanish companies predict an increase in Latin American billings. Brazil, Peru, Colombia and Mexico will be the countries that will receive the largest Spanish investments during 2013. “There’s no contradiction between the nationalizations and the increase in investment of Spanish companies in the region. The percentage of companies that predict that Latin America’s markets will be larger than the Spanish ones have risen from 46 percent to 86 percent,” says MartínezLázaro. He adds that Argentina, Bolivia and Venezuela are the least attractive markets – the countries with the highest number of nationalizations. Coincidence? Sergio Manaut reported from Madrid.

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FINANCE: PRIVATE EQUITY

Brazil tends to see the lion’s share of private equity investments, but that may be changing. Other countries such as Chile, Colombia and Mexico are capturing the eyes of these powerful funds. “What we saw is the fact that Brazil is starting to become a very consolidated market,” said Juan Savino, director of research at Lavca. “Investors are not only seeing Brazil, but also countries beyond Brazil.” Traditionally in Latin America, pension funds or wealthy families own larger companies either privately or by holding stakes in the local stock markets. Private equity funds do not compete with pension funds or wealthy families. Instead, they act as an alternative investment class. “We have seen regulators start allowing investments from pension funds in private equity, and that has supported the growth of this market — this has been a major contribution to the industry, not a competitor,” said Savino.

THE SUPER BUYERS Private equity funds increased their investments in Latin America by 53 percent last year, grabbing a 21 percent share of emerging market private equity. Their focus is on industries that benefit from the emergence of new consumers. BY FORREST JONES

L

atin American economies have been flourishing for several years. Stock markets have rallied, debt burdens are down, millions have left poverty, and demand for goods and services has risen. Yet, for too many companies seeking to ride this wave of growth, traditional sources of financing remain off-limits. Local stock markets or bank loans frequently remain reserved for the region’s massive multilatinas, the conglomerates, and the big players in energy and other natural resources. Not all is lost, however. Plenty of financial

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venues are now available for the mid-sized company seeking to service Latin America’s growing middle class. Enter the private equity fund, an investment pool that buys, streamlines and sells off newly improved companies for a profit. Last year, private equity funds invested a total of $7.9 billion in 237 projects across the region, a 21 percent increase from the amount invested, and a 37 percent increase in the number of deals from 2011, according to research compiled by the Latin American Private Equity & Venture Capital Association (Lavca).

Private equity funds are finding very attractive investments among sectors of the economy that cater to the growing middle class. Last year, consumer and retail companies were the most popular investment targets, accounting for 27 percent of total investments followed by energy concerns at 17 percent, according to Lavca. U.S. private-equity giant The Carlyle Group, for example, last year bought Brazilian toymaker Ri Happy for $352 million and Brazilian furniture company Tok & Stok for $347 million. Those numbers reflect a growing middle class that is demanding more consumer goods, and middle-market companies that are happy to provide them. “A strategy that we have seen in the last couple of years has been the concentration of taking advantage of the growth of the middle class and the consumption of the middle class through investments in consumer-related sectors,” said Savino. “If you go to the stock exchange, you probably won’t see a big weight of those sectors and companies listed there.” Many firms are unable to tap traditional sources of financing for a variety of reasons — they are too small, are unable to handle high interest rates at the bank, or lack the collateral for a loan, for example. Private equity funds, particularly the smaller ones, not only fill that void but are becoming an investment venue of choice.

PHOTO: ©ISTOCKPHOTO / JAMES LANGFORD

MIDDLE-CLASS MIGHT


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“We have seen record fundraising years driven by big buyout firms, or firms that close funds of $1 billion and above. Those fund managers have in general a limited-partner platform oriented to international investors,” Savino said. “When you go smaller, there is more backing from the local pension funds, family offices or local institutional investors.” While it can be difficult to pinpoint the extent to which family offices are specifically investing in Latin America via private equity funds, most agree that interest is on the rise. “We know there is interest from family offices to gain exposure to private equity, and we have seen family offices being in the investor committees of some of these smaller funds,” Savino said. Data from other organizations back that statement. The number of Latin American private-equity deals last year was more than twice as many as those in 2009, according to research from the Emerging Markets Private Equity Association, known as Empea. Deals

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with disclosed values of less than $25 million comprised the largest share over the period, Empea data also revealed, adding that more than half of the deals completed last year were in the consumer, technology and natural resources sectors — those seeking to finance Latin America’s growing middle class. Others agree that for smaller and mid-sized companies looking to grow, private equity may be the way to go, especially due to favorable macroeconomic conditions. Many Latin American economies appear attractive to privateequity funds because the region avoided the overwhelming debt burdens that were the legacy of the crash in the European and U.S. real estate markets. “During the go-go days of the real estate boom, Latin America didn’t really participate in the toxic assets like the rest of the world did five years ago. Turn the clock forward five years or six years and Latin America is doing really well,” said Carlos J. Deupi, a lawyer at the Squire Sanders law firm in Miami who focuses on mergers and acquisitions, private equity and international transactions. “They are not saddled with the toxic assets, and they have really held up a lot better than Europe and the U.S. There’s a lot less debt there on the personal level and on the corporate level.”

HEAD OF THE CLASS Latin America, meanwhile, has proven to be especially attractive among private equity funds, even when compared to other emerging markets. Total capital invested in emerging markets declined by 12 percent to $23.7 billion last year

from $26.9 billion in 2011, according to Empea. By contrast, investment in Latin America increased by 53 percent from $3.2 billion in 2011 to $5 billion last year via 121 deals, representing a 21 percent share of emerging-market private equity, Empea found. “There’s the Latin America growth story, which is of course a great story, but probably the better known one at this point. The story that still needs to be told is that private equity still offers investors better access to the underlying drivers of growth in these markets than would a fixed income or equities strategy alone,” said Jennifer Choi, acting chief executive of Empea. “Public equities in most Latin American economies, and in emerging markets in general, are strongly biased to natural resources and a few sectors. Private equity is the only way to capture greater diversity of sectors and capture the sectors standing to benefit the most from the growing middle class and thus, the consumption story in these markets.” Within the region, other opportunities await outside of Brazil. One market really stands out — Mexico. “We are seeing our clients pay more attention to Mexico than they had in the past. That is driven primarily by the change in the government and the tax, labor and regulatory reforms that the government has either passed or is looking to pass in the near future. Also, the security situation appears to have improved,” said Manuel Iraola, managing director with PwC’s Latin America Deals practice. Proximity to the U.S. also helps, and even though the Mexican economy is massive when compared to other emerging markets, private equity has room to expand in both size and sophistication. “When you compare Mexico to a market like Brazil, where the private equity industry is much more sophisticated and more along the path of maturity, private equity in Mexico is in a nascent stage,” Iraola said. “I would say there’s a huge opportunity in Mexico for private equity.” Any advice for a Latin American company seeking to be acquired by a private equity firm? “Be prepared and do as much of a sell-side due diligence as you can in order to avoid surprises that will impact the valuation that will be ascribed to your business,” Iraola said. Forrest Jones reported from Miami.

PHOTO: ©ISTOCKPHOTO / SUCHOA LERTADIPAT

FINANCE: PRIVATE EQUITY


BUSINESS: HEALTH SERVICES

Models that could change the face of healthcare services in the Americas.

FROM EDUCATION TO TOURISM

Healthcare:

BY ZAYRA PELÁEZ

T

he rising cost of healthcare services in the United States has revived the curiosity about alliances and purchases of health providers in Latin America, with the increasing interest of patients who now seek treatment in Mexico City or Panama City. This is not new, but it does have its interesting novelties. On one hand, some of these partnerships are already showing results, on the other, more and more health multilatinas are interested in expanding to the region. In the U.S., Methodist International, a Methodist Hospital System subsidiary based in Houston, Texas, has developed an affiliation model with several institutions in Mexico and in the Middle East, both in Dubai and in Abu Dhabi. In Mexico, where they affiliated their brand with

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ABC Medical Center in Mexico City, and with TecSalud in Monterrey, is the best example of how this model can drive the development of the healthcare sector in the region. Marcie Guzman, vice president of global development for the Americas, is sure that the future of healthcare in the hemisphere is based in affiliation and collaboration models: “ABC Center went from not having an oncology department to building a worldclass cancer center with technologies only owned at the time by the Mexican public health sector,” Guzman says. As it is not feasible to have every patient come to the U.S., they decided to develop the critical infrastructure so that healthcare can be delivered locally: “our commitment lies on assuring that every component

Cleveland Clinic, less than a decade away from becoming a centennial institution in the United States, pursues its standing consolidation in Latin America and the Caribbean with a strategy based on close relationships with their Latin American peers. It offers continuing medical education opportunities to contribute with the extremely demanding constant update of those who work in the medical field. To achieve this, they have created the Global Physician Associate Program. They are not considering any investments in medical facilities or healthcare organizations in Latin America, however, Alfonso Briceño, vice president for Global Health Center at the Cleveland Clinic, assures that “our goal is that our colleagues will feel comfortable and part of our organization, and to provide them with our tools to better access our programs. Additionally, we’ve had

different partnerships that have allowed us to take our professionals and our programs to distinct scientific organizations, public and private hospitals, and universities throughout the region, assuring the institution’s presence in every scenario.” A quite different approach is that one taken by the Medical Tourism Association (MTA) based in Palm Beach, Florida, the only one association of its kind which totals 300 members in 100 countries and combines hospitals, clinics, physicians, medical assistants, travel agencies and healthcare associations. According to their general manager, Cristina Cardona, “this is a sixty billion dollar industry, which explains why there’s an increasing number of companies, hospitals, governments and other healthcare-related businesses determined to invest in it. Truth is patients who are willing Clínica La Colina en Bogotá

to travel are looking for value.” While so far there is no regulatory entity for the medical tourism industry, and there is no conclusive information on the number of patients who travel seeking treatment or procedures, medical tourism is also benefitting from the rising trend of international accreditations in the healthcare sector, such as the one given by the Joint Commission

PHOTOS: ©ISTOCKPHOTO/ EXDEZ; BANMÉDICA

The North Eyes South

of this infrastructure will be at the first level, and I don’t mean just buildings, I mean technology, support networks, nursing, medicines, everything that defines the service. Our professional teams are in constant contact with their counterparts in each country, evaluating performance, adjusting strategies,” she added. Methodist International’s model combines the medical training for health professionals, the improvement of affiliated locations, and the development of strategies involving best practices, leading-edge technology, advisory and management. With this same model of affiliation and collaboration they participate in Central America and the Caribbean, they are starting to generate opportunities in Colombia and Brazil, and soon enough they will be exploring Ecuador.


BUSINESS: HEALTH SERVICES

International ( JCI), ensuring the quality of health services offered by healthcare organizations. This is critical when promoting a medical center in the international market, and becomes a competitive advantage.

THE SOUTH GETS READY Truth is the globalization trend is increasing worldwide, especially in the last five years, driven by the steady increase in healthcare costs. In countries like the United States, the economic crisis has left millions of people out of health insurance coverage or with low cost insurance, with very limited coverage and high co-payments. Many organizations cancelled their company sponsored employee health benefits just to survive, which resulted in the search abroad for services at a lower cost.

Efforts to widen participation in the field are also being made in Latin America. Such is the case of Banmédica, the Chilean multinational that has built a group of clinics, specialized labs, cuttingedge technology, complementary healthcare plans and ambulance services. Fernando Robledo, president for Banmédica Colombia, notes that “Latin America’s economic forecast will undoubtedly bring international investors into the sector.” In fact, the organization has expanded to Peru with Clínica San Felipe and Laboratorios ROE. In Colombia, they have acquired a significant stake in Colmédica, a private healthcare plan provider, Clínica del Country and Clínica La Colina, both in Bogotá, and Portoazul, a recently inaugurated medical center in Barranquilla, on the Colombian

Atlantic coast. The latter is a step forth in the expanding strategy aiming the northern hemisphere, and it’s their spearhead in the Caribbean and North American markets. According to Consuelo González, Clínica del Country’s president: “the scientific level, both technologically and professionally, and the costs for medical procedures and specialized tests, makes the clinic a preferred destination for cancer treatments, joint replacements, plastic and bariatric surgery. Furthermore, our clinic has agreements with international healthcare insurance organizations such as Bupa and with countries like Aruba, Curaçao and Suriname.” Opportunities seem to shine everywhere, from hospital or diagnostic centers management to healthcare providers, ambulance

services or home care. For many of these businesses, the region is extremely attractive. Clearly put: the IFC, World Bank’s subsidiary, reports an investment of $378 million, until mid 2012, in private projects in six Latin American countries. This is the second highest figure for the IFC, after their $389 million investment in Eastern Europe. Almost every model works: U.S. organizations that have affiliated with Latin American hospitals, like Johns Hopkins with Punta Pacífica in Panama, or Latin American companies, like Farmatodo pharmacies, which expanded to neighboring Colombia. With these opportunities on the table, now it seems we’re only missing the entrepreneurs. Zayra Peláez reported from Miami.

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SPECIAL REPORT: TRADE AMERICAS

SMALL SPELLS STRONG FOR US BUSINESS After four years of slow economic growth in the United States, small companies there are discovering new opportunities for broadening their commercial markets in Latin America.

T

he World Bank and the International Finance Corporation have sent a blunt message to the world in their latest Doing Business report: the top priority, it says, is the need to create a favorable environment for small companies. For the first time in its 10 years of existence, the report focuses on conditions for them. And, in a clear sign that this business segment is crossing borders more frequently, the report provides a guide par excellence for those establishing operations outside of their home territory. Small businesses in the United States (those with fewer than 500 employees) are not ignorant of this trend. On the contrary, they are setting the pace on globalization of aspects such as the penetration of small for-

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eign businesses in Latin America — a process that is strengthening, with broad and growing potential. The proliferation of free trade agreements with countries within the region is the main reason behind this dynamic. The North American Free Trade Agreement, which unites Mexico with the United States and Canada, is responsible for a large part of the transnational operations of small American businesses in Latin America. Nafta facilitates commercial operations between the United States and Mexico – a country which, in addition to its geographic proximity, constitutes the second most important Latin American market after Brazil. Broadly speaking, trade agreements with

Latin America have boosted the performances of small U.S. businesses, but have also been helped by other accords, such as those of mutual recognition, bilateral investment treaties, framework agreements for trade and investment, and the agreements of the World Trade Organization. These translate into advantages that include tariff reductions, the reduction or elimination of non-tariff barriers, better access to markets, easier interaction with customs, facilitation of trade, protection of intellectual property, a more efficient and transparent regulatory environment and mechanisms for conflict resolution. In addition to the purely commercial elements, in the opinion of Juan Pablo Cuevas, director of Bank of America’s global transac-

PHOTO: ©ISTOCKPHOTO / STUDIOVISION

BY ÁLVARO MORENO


SPECIAL REPORT: TRADE AMERICAS

Middle market companies from all over the United States have been buying companies valued at between $30 million and $50 million in Latin America.

PHOTO: BANK OF AMERICA MERRILL LYNCH

Juan Pablo Cuevas, director of Bank of America’s global transaction services for Latin America and the Caribbean

tion services for Latin America and the Caribbean, the determining factor for the greater presence of U.S. middle market companies in Latin America is: the displacement of China. For Cuevas, over the past 10 years, there has been an obvious increase in the number of U.S. middle market companies in Latin America that are responding to the redirection of investment that many large American companies made in China. These were a consequence of the smaller incentives the Asian giant offers today as part of its process of transition into a more developed economy. “To take advantage of the commercial ties established more than 20 years ago – before so many companies moved their operations from the United States to China – middle market companies from all over the United States have been buying companies valued at between $30 million and $50 million in Latin America. They were improved by their knowledge and technology and were able to take advantage of this by providing goods and services to the large U.S. companies established in the region,” Cuevas says. His bank has vast experience in advising middle market companies in the processes of regional expansion. This change of direction has taken place during a time of high stress for U.S. business

leaders due to the prolonged financial crisis and the slow recovery of internal consumption in their own country. As with the large companies, small businesses have sought to open new markets to compensate for the reduction in internal demand for their goods and services. Latin America is thus seen as the most obvious option for launching an expansion for the new North American transnationals because, in addition to the trade agreements and geographic proximity, the region has experienced economic growth of up to five times greater than that of the United States in the last four years, opening commercial possibilities due to the economic transformations that this implies. Willy Goméz, commercial banking senior vice-president, Southeast, HSBC Bank USA, is convinced that this is what drives the proliferation of investment by small businesses in Latin America. “The companies have seen that their ability to grow in the United States is very limited. This has led them to look at global markets, and Latin America is a good place to look at. Many other aspects are impossible to ignore. For example, although it is not so evident, cultural closeness plays a very important role for a small business when it decides to

launch a foreign operation, and here again Latin America offers unarguable advantages. Authorities on this issue, such as FritzEarle McLymont, director of the National Minority Business Council (Nmbc), understand this. He says small U.S. businesses are especially well-positioned to take advantage of Latin American markets given that many of these companies share cultural relationships with Latin America. Private institutions, such as the Nmbc and public entities including the U.S. Small Business Administration, the United States International Trade Commission (Usitc) or the United States Export-Import Bank promote and facilitate the international expansion of U.S. small businesses, and in turn become another driver of this new trend.

BEHIND EL DORADO Beyond the obvious opportunities offered by Mexico, the entire Latin American region represents an opportunity for small U.S. companies that they should not underestimate. Though it has a smaller per capita gross domestic product than Mexico, Brazil has almost twice its population, and together they represent about half of the region’s total population. All of Latin America, with the lone exception

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SPECIAL REPORT: TRADE AMERICAS

We support a large number of funds specializing in specific sectors, such as technology, biotechnology or communications, independent of whether the capital funding is Latin American or foreign.

of Uruguay, has a middle class that has shown strong growth during the last decade, according to a World Bank study. This broadening of the middle class has obvious advantages in terms of the purchasing power of their populations and the expansion of business activities, elements that represent an enormous opportunity for U.S. small businesses. In 2012, Mexico represented more than half of U.S. trade with Latin America and grew 7.1 percent compared with 2011, despite its established predominance, according to information from the U.S. Census Bureau compiled by our sister publication Latin Business Chronicle. In fact, 2012 was a good year in general for U.S. trade with Latin America, growing by 6.2 percent over 2011, thanks to a sizable increase of 9.3 percent in exports and a moderate increase of 3.7 percent in imports. U.S. trade with its 10 main Latin American trading partners, which represents 94 percent of its total trade in the region, grew in every case except for the Dominican Republic, its tenth largest trading partner, which showed a slight contraction of 0.4 percent. Even more surprising was the growth of trade with Costa Rica and Chile, the sixth and fifth largest trading partners, where cross-border transactions of goods and services increased by 18.9 percent and 12.8 percent respectively. The region’s fourth country in importance for trade with the United States – Colombia – also showed strong 9.6 percent growth in two-way trade, a sign that the free trade agreement that came into effect one year ago

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between those two countries is already showing results. As for the Latin American countries that showed the strongest export growth by the United States, Venezuela stands out with an increase of 42.8 percent over 2011. It is followed by Cuba, where the recent changes in the management of its economy have enabled U.S. exports to be 28.1 percent higher than those of the previous year. Panama also grew in importance for U.S. exports, increasing by 20.3 percent during that period. To what extent are U.S. small businesses participating in this change? Ninety-seven percent of all exporting companies in the United States are small businesses. Their exports represent 30 percent of the total value of exports from the United States and Mexico, the second preferred destination country of U.S. exports after Canada. In contrast, slightly more than half of the large companies export to five or more countries. One way to quantify the export potential of these companies is to compare their activity with that of similar companies in other developed markets. According to a study by the Usitc, small businesses in the European Union represent 40 percent of total sales of manufactured products and 31 percent of the manufactured exports, while in the United States, small business represents only 19 percent of total sales of manufactured goods and 13 percent of the manufactured exports. This margin of participation of small businesses in total exports is one of the primary

goals that should be pursued to maximize these companies’ opportunities in the region. United States Trade Representative Ronald Kirk has been emphatic in repeating that small and medium-sized businesses are vital for the U.S. economy, and for that reason he has called for Usitc to develop more public policies to promote these exports, since “many analysts believe that the participation of small business in American exports could be higher if national policies were more clearly focused on the specific obstacles to exporting that confront these companies.” Kirk has maintained this position since 2009. In a public letter issued that year, he said: “Given that the trade policies of the United States are designed to open markets, comply with trade agreements and support the orderly development of trade, it is fundamental that small business should benefit as much as possible from exporting goods and services to foreign markets and contribute as much as they can to the growth of total exports from the United States. To achieve this objective, certain export restrictions facing these companies will have to be eliminated.” All of the foregoing is important if they are to take advantage of the opportunities that are opening today in Latin America, in sectors such as electrical products and electronics, computers, transportation machinery and equipment, and chemical products, areas of merchandise exports for small U.S. businesses that were found to have great potential in another Usitc study. This last study also found

PHOTO: CAF

Manuel Malaret, director of promotions for small businesses of the CAF, the Latin American Development Bank


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SPECIAL REPORT: TRADE AMERICAS

Even with practices of payments and collections that could be done more efficiently to increase their productivity, the export sector of the Latin American small businesses is very attractive.

some revealing evidence: a good part of the growth of merchandise exports from U.S. small companies during the last 10 years has been due to an increase in the number of new small business exporters, while the growth of exports of the large companies has resulted almost exclusively from increases in the value of their existing exports. One element worthy of attention is in the affiliates of small U.S. service businesses in Latin American companies. According to Usitc data, this type of company has foreign affiliates mainly in Europe (52 percent), followed by Asia and Oceania (24 percent), and Canada (15 percent), while Latin America and the Caribbean is a distant laggard on the list with only 8 percent. Juan Pablo Cuevas of Bank of America says this trend is changing rapidly. “In the last two years, there have been easily more than 100 middle market companies of ours that have set up in Mexico, with another 50 or 100 in the rest of Latin American in this same period,” he says. As for the sectors where this is happening, Cuevas says there are differences among the countries, although sectors such as construction and technology are high in all Latin American markets. As for specific cases, from his experience, Cuevas comments that “in Colombia the number of middle market companies that arrive to provide goods and services throughout the supply chain in the oil and gas sector has

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grown, something we have also noted in Brazil.” He also highlighted the boom of middle market U.S. companies providing financial services in Panama and Costa Rica, while in Costa Rica there is also much activity in the technology and communications sector. Chile represents an exceptional opportunity for the technology and communications sector for interested middle market companies. Willy Goméz of HSBC says the sectors that traditionally have been the most popular for small U.S. businesses, such as private aircraft, cellular telephones, computers and printers, still provide excellent opportunities. As for the new winners, Goméz says there is potential in machinery for petroleum and gas, and the field that is opening now is for producers of auto parts. He also notes that “with the change that is taking place in China, some of the manufacturing of textiles is returning to Latin America.” He adds that “the financial sector is one of the important players, due to the opportunities in the strong capital markets of the region.” In the field of financial services, meanwhile, there is a sub-sector that is increasing in the region due to the large number of innovative undertakings that are developing in every corner of Latin America: investment funds. On this theme, Manuel Malaret, director of promotions for small businesses of the CAF, the Latin American Development Bank, says he is surprised by the growth potential that

risk capital funds have shown in the region. From the standpoint of the CAF, Malaret says he supports such funds because he has found them to be the ideal mechanism for servicing large numbers of small businesses that CAF cannot help directly. “We support a large number of funds specializing in specific sectors, such as technology, biotechnology or communications, independent of whether the capital funding is Latin American or foreign,” he says. The opportunities for small U.S. companies are countless, though this does not mean that jumping into the market in the hope of conquering Latin American markets is a guarantee of success. In addition to the obstacles that persist for doing business of any kind, large or small, in the region’s countries, the biggest difficulty for small transnational companies are on the ground, because local competition is becoming increasingly sophisticated and enjoys improved conditions that makes it stronger. As Diego Rodríguez, director of commercial solutions for Visa, says, “In 2010, we conducted a study to understand how the small business exporters to Latin America were doing and we were surprised at the results. Even with practices of payments and collections that could be done more efficiently to increase their productivity, the export sector of the Latin American small businesses is very attractive.” Álvaro Moreno reported from Miami.

PHOTO: VISA INC.

Diego Rodríguez, director of commercial solutions for Visa


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TRADE AMERICAS

José Fernandez

If we can get more American businesses to partner with small and medium-sized Latin American companies our foreign affairs will benefit.

SMALL-SCALE

DIPLOMACY U.S. policies to support small businesses in Latin America will help consolidate the country’s ties to the region. An interview with José Fernández, U.S. assistant secretary of state for economic and business affairs.

A

fter decades of enjoying a dominant position as the main trade partner of Latin America, the United States is working to further ties among small companies in an attempt to counteract China’s aggressive push in the region. The White House has recently announced the launch of the Small Business Network of the Americas, a program to promote and support Latin American small and medium-sized companies. The announcement was made in April in Tampa. The goal of the program, the White House said in a press release, is “to promote and support job creation in small and medium-sized enterprises and encourage greater trade among these businesses throughout the Western Hemisphere.” “If we can get more American businesses to partner with small and medium-sized Latin American companies, our foreign affairs will benefit,” said U.S. assistant secretary of state for economic and business affairs, José Fernández, in a recent group interview with Latin Trade in Miami. “This kind of trade is a good way to promote human ties (…) and to advance what we call

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‘soft power’ in the region.” Fernández, who spoke in Spanish, did not mention the small-business network specifically as a strategy to counteract China’s advances in Latin America. However, Washington clearly believes that promoting trade based on basic human interaction between Americans and Latin Americans could be a wonderful antidote to China’s seduction campaign in the region. If Beijing’s strategy has a weakness, it is the enormous cultural gap with the region. Latin America and the U.S. have common cultural cues that are lacking with China. As a result, President Barack Obama has thrown all the weight of his government behind the initiative, trying to extend to the region the American model of Small Business Development Centers to counsel, train and help small companies with market intelligence and research. So far, several such centers are already operating in Mexico and El Salvador. Washington’s interest in expanding trade among the hemisphere’s small businesses is twofold. On one hand, the U.S. sees its companies as

providing a competitive advantage for its commercial interests in Latin America. On the other hand, the Obama administration believes that small companies can help pull the U.S. out of its worst financial recession of the last 70 years. “In the United States, the job growth of the last five to 10 years has been almost all due to small companies. These businesses are a job engine and also a source of innovation,” Fernández said. The Obama administration also said that it will support programs such as the Latino American Idea Partnership and the Caribbean Idea Marketplace, organizations of Latin American and Caribbean expats whose goal is to promote trade and business ties between the United States and their home countries. Obama promised to contribute up to $150 million to these organizations to help them finance Latin American and Caribbean start-ups with innovative business plans. Washington is also offering up to $100 million in loan guarantees to encourage financial institutions in the region to increase lending to SMEs. Alejandra Labanca reported from Miami.

PHOTO: ISMAIL ZITOUNY/REU TERS/NEWSCOM

BY ALEJANDRA LABANCA


STEADY GOES IT The outlook is bright for the region’s insurance industry. Brazil, Mexico, Colombia and Chile will grow faster, and a new wave of mergers and acquisitions is heading to Latin America. BY DAVID RAMÍREZ

A

fter mixed, yet reasonable growth last year, Latin America’s insurance sector will continue to expand in the short to medium term, executives and analysts say. The trends are favorable, including the increase in consumers’ purchasing power, changes in consumption habits, and easier access to the supply of products offered by the industry. Some factors may conspire against a favorable performance, including a deterioration of the global economy, yet the majority of those interviewed by Latin Trade for this report voiced optimism. Jorge Luis Cazar, regional manager for ACE Group, told Latin Trade from Santiago de Chile that the potential for growth is important, given that insurance penetration in Latin America barely reaches 1.5 percent of gross domestic product. “While there are some risks that the region is facing, it is realistic to expect

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the insurance market to grow in the range of 3 percent to 4 percent per year in the next three years,” Cazar added. Michael Raney, chief executive of Zurich Latin America, pointed out that “the increase of insurance penetration in the region will remain supported principally by the phenomenon of the expansion of the middle class, to the extent that the regional GDP is growing and there is an ongoing gradual cultural change in favor of increasing consciousness of the importance of insurance.” In regards to specific business lines, the majority of those consulted expect continued dynamism of automotive-related products in tandem with growth in the number of cars in the region; surety for concessions and infrastructure megaprojects; and those associated with increased social-security coverage, including health, life, and professional hazards. In contrast to last year, faster world trade growth is expected to support the recovery of trade finance-related insurance. The expansion of multilatinas could become yet another driving force. According to ACE’s Cazar, the multilatinas “grow every year, not only in the region — basically Chilean, Colombian and Peruvian companies — but also in other continents, mainly Brazilian, Mexican and Argentine companies,” thus generating opportunities for new products and services. Cazar added that seizing this and other opportunities hinge on the execution of plans: “Basically, everyone knows what to do and where the opportunities are. Whoever manages to stand out will prevail. Failures are sure to happen for those who think that Latin America is an easy market in which to make money.”

THE BRIGHTEST OUTLOOK Brazil, which is the largest market for insurance in the region, offers a favorable outlook for the business as its economic growth will gain pace this year. Surety, or performance bonds in “projects associated with the World Cup and the Olympics will continue, but that is only a small percentage of the huge pent-up demand for infrastructure investment, which will continue to grow,” Raney noted. Zurich’s executive also underscored that a more massive consumption of the industry’s products will strengthen: “There is a lot of activity in non-traditional distribution channels, for example, through department stores and mobile telephone points of sale... and consumers are likely increasingly to demand new and more sophisticated products.”

Ricardo Brockmann, chief executive of Marsh for the region, said there is space for the industry in Mexico to maintain a favorable pace of expansion. “Insurers will continue to expand in micro-insurance and basic products for small and medium enterprises, while their businesses with larger companies will grow through more complex products that have access to re-insurance,” noted Brockmann, who also underlined that “there are at least 64 mega-projects in roads, ports and airports that will require performance bond coverage, and that will help the industry.” Brockmann did not dismiss the possibility of an expansion of casualty automotive insurance that could grow if Mexico generalizes the requirement to have liability insurance (in other Latin American markets, this product is mandatory). However, the experts noted that, although premium growth will be robust this year in the Mexican and Brazilian markets, the insurance industry in both countries will face reduced profit margins as competition intensifies. Also in Brazil, there is expectation about the potential impact of the elimination of fiscal incentives for the purchase of new cars, as well as the emergence of a new state-owned insurer, Segurobras, in a market that some believe is already oversupplied. In regards to Chile, José Manuel Camposano, president of the country’s Association of Insurers, identified two clear trends that in his opinion will determine the behavior of the Chilean insurance business in the short to medium term. “First, there is a deep change in consumers: they demand more rights, more information and — in the case of suppliers — to meet what was offered. That has a high impact on an industry that is based on trust.” “But in addition,” Camposano said, “the most important regulatory changes since 1980 are about to be enforced, and they will transform the supervision model, on the one hand, and, on the other, will potentially require capital increases from market participants.” In the Andean countries, particularly Colombia, Andrés Osorio, country manager for Metlife, noted that “the surety business will grow extensively on the intention to execute infrastructure projects, although all depends on the pace of execution of the works.” Metlife’s executive also commented on the use of alternate distribution channels for insurance purchase. “If regulation protecting consumer information and consumer rights is taken to an extreme, many limitations will be created to access more consumers through alternative and low-cost distribution channels.

PHOTO: ©ISTOCKPHOTO.COM / MHJ

SPECIAL REPORT: INSURANCE


SPECIAL REPORT: INSURANCE

Basically, everyone knows what to do and where the opportunities are. Failures are sure to happen for those who think that Latin America is an easy market in which to make money. Jorge Luis Cazar, regional manager, ACE Group

Colombia and the rest of the world have a major challenge in balancing the protection of consumers and their information with the need to sell products massively.” Alejandro Pavlov, from Moody’s, confirmed his agency’s positive outlook on Colombia. “We expect that this country will strongly contribute to the growth of insurance for businesses in the region on account of developments in particular needs in public works, infrastructure and commercial risks.” Diego Nemirovsky, of Moody’s in Buenos Aires, commented that insurance companies in Peru are making a gradual but sustained effort to increase the low penetration rates that characterize the Peruvian industry and added that “it is expected that insurers will continue to diversify commercialization channels, such as insurance-banking and alternative marketing.” The rating agencies’ outlook is not positive for Argentina and Venezuela, where macroeconomic and regulatory conditions are adverse. For Argentina, Nemirovsky highlighted that, while economic growth is favorable to insurance activity, principally in the life segment, generally the regulatory environment and relatively high inflation hamper the growth of premiums sold to corporations. “The industry is affected by the negative outlook of the Argentine bonds and by a deterioration in the capitalization of the insurance firms,” the Moody’s analyst added. For the Central American market, Eduardo Recinos, director of Fitch Ratings, pointed to the dynamism of Costa Rica and Panama. “Although both are small markets, the opening of the sector in Costa Rica in 2009 has promoted an increase in penetration and a price war that favors consumers. New firms have entered the market, and there has been an increase in corporate insurance products, such as medical insurance and fire casualty,” Recinos said. He added that “in Panama, the performance bonds business also has a great potential, coming from private construction and the expansion works for the Canal.” Recinos commented there are no big expectations of dynamism in El Salvador, Guatemala or Honduras, although from a credit perspective,

Fitch maintains a “stable” outlook over the insurance industry of the sub-region as a whole.

MERGERS AND ACQUISITIONS MAY GAIN PACE The higher requirements for minimum operating capital and corporate governance that the supervisory bodies are imposing over insurers in the region will help to catalyze mergers and acquisitions activity across Latin America in the short to medium term. Oliver Futtercknecht, chief economist for the region at Swiss Re, noted that “there will be more M&A business in 2013 as Latin America is experiencing a boom that is also due to regulatory changes.” In Brazil, “possibly the less capitalized firms will be under pressure owing to the new regulations on capital requirements, which will represent opportunities for the bigger firms, including the international players,” according to Diego Kashiwakura of Moody’s in Sao Paulo. In Mexico, the recently approved insurance law will possibly generate new M&A “as small and medium-sized companies will not be prepared for the type of changes required regarding capitalization, as well as organizational structure,” said José Montaño, of Moody’s in Mexico City. The domestic and international insurers will be key players in those M&A processes because Latin America will unquestionably continue to be a magnet for foreign investment. As Alan Murray, senior vice-president for Moody’s in New York, told Latin Trade: “Among major developing markets worldwide, the Brics countries are often cited. But in the insurance market context, one could replace ‘B’ (Brazil) with ‘LatAm’ overall as a region of significant growth and development.” Compared with the rest of Brics, Latin America “broadly seems to be a region experiencing a combination of economic growth, improving sovereign and operating environments, generally stable political structures, as well as a growing middle class, and an open-competitive market structure, making it an attractive and increasingly vibrant insurance marketplace.” David Ramírez reported from Miami.

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INDUSTRY REPORT: TOURISM

The Chinese have become the world’s most important group of outbound tourists. But ,what are Latin American entrepreneurs doing to attract them? BY RUTH MORRIS

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hey are ravenous for adventure, ready to spend, and their ranks are growing fast. The Chinese have become the world’s most important group of outbound tourists, poised to overtake all other nationalities in sheer numbers this year, said Wolfgang Arit, director and founder of the China Outbound Tourism Research Institute. And, Latin America could be their next port of call. Arit says opportunity is knocking. While an early wave of Chinese globetrotters saw Latin America as distant and dangerous, a new crop of younger, more seasoned travelers is emerging and searching for unique experiences. A 24-hour journey is not much of a deterrent to them; the chance to buy a Brazilian gemstone, priceless. “The numbers have been exploding,” said Arit. “China is the No. 1 source market (of international tourists) in the world.” While many head to Hong Kong and Macau, Arit said a hefty 30 million Chinese traveled beyond these favored stomping grounds last year. Europe, Australia and the United States were top destinations, but repeat travelers are looking further afield. Like a Rolex watch, foreign travel confers prestige in China, he said. Regaling friends

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with stories about places they haven’t visited yet can carry extra clout. “It’s like the Oscars,” said Arit. “If you are a film star, you want to make sure no other film star is wearing the same dress.” His message to Latin American tourism agencies marketing to China: “Don’t say, ‘It’s not expensive to come here.’ Say, ‘It is expensive, but very, very special’.”

SELLING SOUTH AMERICA Several South American countries are already ramping up efforts to draw Chinese visitors. Since Chinese tourists tend to apply for visas to see several countries in one trip, Latin American tourism officials banded together two years ago to kick off an annual traveling roadshow in major Chinese cities. Geared towards hundreds of Chinese tour operators, the roadshow has featured representatives from seven South American countries so far, including Chile, Argentina, Peru, Colombia and Brazil. Together, they expound on their countries’ touristic top-sellers: Peru’s Machu Picchu, Patagonia’s ice fields, Chile’s vineyards. In 2012, almost all the representatives stressed recent growth. Peru saw 2011 visits by Chinese tourists increase by 25 percent, while

BRAZIL, BREAKING STEREOTYPE Arit pointed to Brazil as the country with the biggest potential to draw Chinese tourists. Marketers are doing well to swerve away from the typical promotional materials. Carnival brochures can stay in the drawer, he said, since many Chinese men find Brazil’s sensual and scantily clad carnival dancers “too strong.” Lots of Chinese tourists, he said, will want to compare Brazil’s Olympic Games to their own, or Brazil’s economic rise to their own emergence on the world stage. “Brazil doesn’t have to use stereotypes. That’s good news for Brazil,” he said. Brazil can sell itself as a business partner, rather than a sambadriven party scene. Latin American tourism promoters should address Chinese tourists’ security concerns. This might mean providing a chaperone to help them avoid pickpockets, or a health consultant to explain recommended vaccinations. The Chinese “are fascinated” with Latin America, he said, “but you don’t want to get killed.” Ruth Morris reported from Shanghai.

PHOTO: ©ISTOCKPHOTO.COM/ TOMWANG112

CHINESE GOLD

Brazil saw a hefty 48 percent spike. Chinese tourists are healthy spenders, Arit noted, and gift generously upon their return. Argentina noted that Chinese visitors were spending an average $8,000. Arit said some Brazilian gem stores have hired Mandarin speaking sales staff to meet demand. Gonzalo Matamala, Chile’s Beijing-based trade commissioner, acknowledged that his country probably couldn’t be much further from China, but he said inconvenience is not necessarily a drawback. “Direct flights, there aren’t,” he acknowledged. “Chile is exactly on the other side of the earth.” But, he added, “We can emphasize the mystery… the fascination of seeing something new. To go to Antarctica, a football game in Argentina, that’s something exotic.” Matamala said Chinese visits to Chile rose 80 percent between 2006 and 2011. Chile received about 11,000 Chinese tourists in 2012, and he expected the number to grow by at least 20 percent a year. As trade between Chile and China grows, he sees increased interest among Chinese business travelers to add on a few days of sightseeing. Given the distance and expense involved, Matamala said Chile’s appeal is best suited to China’s high-end traveler, “who has already been to the United States and Europe … ”


INDUSTRY REPORT: COFFEE


SPECIAL REPORT: HOSPITALITY

TURNING ON THE TAPS Economic trends, government policies and speculation are driving tourism and hospitality investment into Latin America’s untapped tourism potential.

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recent report from the World Economic Forum highlights the optimism that drives investment in Latin America’s hospitality and tourism segments. But, it also underscores the challenges and vast country-by-country differences that prevent further opportunities for investors. Latin America has “untapped market potential for tourism, especially considering its natural resources and culture,” said Thea Chiesa, the World Economic Forum’s Geneva-based director and head of aviation, travel and tourism industries. “It’s vast, and it’s not as visited as it should be.” The Forum’s recently released Travel & Tourism Competitiveness Report for 2013 compares 140 economies worldwide. In the Americas, the results require a fine-tuned analysis, given the widely different conditions in each country. Among the Latin American nations faring best in the rankings is Panama, which jumped to number 37 position globally and fourth in the Americas. While the report said that the country’s most important competitive advantages are its endowment of natural resources, protected land areas and World Heritage sites, it also emphasized that Panama’s improved ranking is mainly due to infrastructure im-

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provements. Some $842 million was injected into tourism and hospitality last year, while a new Metro rail system and convention center are underway and airport expansion continues. The World Economic Forum is not the only organization talking about Latin America’s appeal for investors in hospitality and tourism. During the Americas Lodging Investment Summit in January, Jones Lang LaSalle’s Hotels & Hospitality Group reported that Latin American economies are expected to grow by 4 percent annually through 2020 — creating further opportunities for travel, tourism and hospitality. Jones Lang LaSalle predicted that Brazil, Chile, Colombia, Mexico and Peru will show the most growth in these sectors.

SEEKING STABILITY Overall, Chile maintains one of the most stable reputations in Latin America for investors in hospitality and tourism. It ranks ninth in the region and 56th globally in the World Economic Forum’s report, which praised Chile’s policy rules and regulations as conducive to tourism and travel development, with few foreign ownership restrictions, a liberal visa regime, and bilateral air service agreements. “Chile is very developed economically, so it’s

not difficult to invest in any area,” according to Nicolas Sahil, managing partner at The Singular Hotels, a Santiago de Chile-based company that launched its first hotel, the Singular Patagonia, in 2011, and plans to open the Singular Santiago in 2014. Sahil said that his company is looking for similarly favorable conditions as it considers building boutique hotels in other South American countries. Colombia and Peru are the standouts, he said, because of their growth rate, governmental stability and economic transparency. What destinations would he avoid? “Countries like Argentina and Venezuela, where it’s very difficult” to invest, he said; corruption and government intervention are among his biggest concerns. Stability and transparency are also important for Andres Sanchez, development director at GHL Hoteles, a Bogota-based company that operates hotel franchises and management contracts in five South American countries as well as Costa Rica and Panama. “In the case of Argentina, it’s the difficulties of financing for investors, and the perception of general political instability that doesn’t stimulate the hotel sector, even though tourism activity maintains a normal growth rate.”

PHOTO: ©ISTOCKPHOTO.COM/ KORHAN HASIM ISIK

BY MARK CHESNUT


SPECIAL REPORT: HOSPITALITY

Like many investors, Sanchez is taking a “wait and see” approach to Venezuela. “It’s a bit difficult to attract foreign investors, because the government has changed from moment to moment,” he said. “Now, there is, shall we say, a moment of tranquility; a situation where we could say that businesspeople have expectations about what will happen politically. When they see a clear sign of investment security, we believe the marketplace will become much more dynamic.”

BRAZIL’S PROMISE AND CHALLENGES Brazil has made headlines on the tourism front, as infrastructure projects continue and new hotels rise in preparation for the 2014 FIFA World Cup and the 2016 Olympics. But despite this burst of growth and publicity, the country’s ranking with the World Economic Forum report rose only one position, to seventh in the Americas and 51 overall. The lack of a more sizeable jump was attributed to low scores for Brazil’s ground transportation network and lack of price competitiveness, with “high and increasing” ticket taxes, airport charges and overall prices. The World Economic Forum also gave it a “not particularly conducive” rating in terms of overall policy environment, with “discouraging” rules on foreign direct investment and excessive amounts of time required to start a business.

Still, companies such as Starwood Hotels and Resorts are seeing continued promise in South America’s largest nation. “The government has shown clear signs of trying to attract investment,” said Federico Greppi, the company’s chief financial officer. “They have reduced interest rates significantly, and the president has announced cuts in payroll taxes.” Ricardo Suarez, Starwood’s vice president of acquisitions and development, sees Brazil’s greatest potential in the upscale segment — especially since mid-priced hotel chains have expanded so quickly in recent years. “If you look at Brazil, over 80 percent of the hotels are mid-scale or budget,” he explained. “There really is a lack of upscale product.” Brazil also is ripe for development in the meetings and conventions segment, according to Caio Calfat, vice president of real estate and tourist affairs at Secovi-SP, a real estate syndicate that works with foreign investors looking to get into the Brazilian market. As an example, he said that the city of São Paulo alone hosts more than 90,000 events and conventions every year, and “we don’t have more because we don’t have space for it. If we had double [the space], it would all be occupied.”

SPEED LIMITS By nature, today’s rising stars may be the ones with fewer opportunities in the future, noted Luigi Major, managing director of HVS Consulting & Valuation Services in Houston. “When there is a situation with rapid growth, you have people building hotels all at the same time. And, it’s really hard to do any sort of forecast. In a market like Panama, the hotel market is collapsing. You have a lot of new supply that is entering the market in such an uncontrolled way that it’s hard for us to keep up with the pace of the growth. It’s a market that’s already avalanching. So that’s an extreme example of what could happen to other countries if investors continue investing without investigation and research.” Hoteliers agree that Panama is feeling the effects of its fast growth. “It’s going to take about four or five years for demand to normalize the occupancy rates to what they had

Hoteliers agree that Panama is feeling the effects of its fast growth.

SPECIAL ADVERTISING FEATURE

Delta Air Lines enhancing customer experience to become the best U.S. airline in Latin America. Over the last two years Delta Air Lines has invested $3 billion to enhance customer experience at all levels, from the moment a customer books a reservation on the recently re-launched www.delta.com to their experience on newly designed international terminals in the Atlanta and John F. Kennedy international airports to the superb on-board experience. Part of these improvements includes the remodeling of Delta’s fleet to add full flat-bed seats in the BusinessElite cabin, the popular Economy Comfort class, a redesigned menu for BusinessElite by Chef Michelle Bernstein as well as Master Sommelier Andrea Robinson’s upgraded wine program, and the expansion of its state-of-theart entertainment system in flights to and from Latin America. Connectivity is key to Delta’s customers. Thus, part of becoming the best U.S. airline in Latin American and the Caribbean means providing customers more reach to business and leisure destinations in key markets. This is achieved thanks to Delta’s strategic alliances with GOL Linhas Aéreas Inteligentes, Aeromexico and Aerolíneas Argentinas, providing customers access in Brazil to 99 percent of domestic demand points – more than any other U.S. airline. In Mexico, Delta’s customers have access to a large network of flights to the interior of the country. Likewise, the alliance with Aerolíneas Argentinas increases Delta’s offerings in South America. Understanding the needs of today’s travelers means not only providing unique service at airports, on-board and through expanded networks, it also means being there to listen and assist through the communication channels that Delta’s customers prefer to use along their travels. Along with www.delta.com, Delta´s three new social media channels for Portuguese and Spanish speakers, fostering communications through different channels. Delta’s Twitter channels -@DeltaAssist_ES and @DeltaAjudaprovides real-time customer support before, during, and after travel, while the Facebook channel goes beyond customer service to provide helpful Brazil specific travel tips and guidance to enhance the travel experience for Brazilian consumers. It may be found at: http://www.facebook.com/DeltaAirLinesBrasil. For Delta, supporting the needs of our customers every step of the way is part of becoming the best U.S airline in Latin America. Next time you travel with Delta remember that every day over 80,000 employees of Delta worldwide work diligently to provide you a unique experience wherever your travels may take you in 32 countries and 49 destinations in the region with more than 1,000 weekly flights between Latin America and the U.S.

MAY-JUNE 2013 LATIN TRADE

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in 2008 or 2009, when it was 90 percent,” said Sanchez, whose company operates five hotels in Panama, including the just-opened Royal Sonesta Hotel & Casino Panamá. “Today, we’re lucky to have 54, 55 percent.”

GOOD GOVERNMENT Investment-friendly government regulations and limited intervention can be a deciding factor for investors looking to enter new markets. “Any regulation that takes the friction out of investment and ownership of your entities or properties is going to invite retailers, hoteliers all kinds of companies that do business,” said Milton Pedraza, chief executive of the Luxury Institute, a New York City-based research and luxury consulting company that just opened an office in Bogota. “The number one attraction for investment by foreign companies is tax exemption,” according to Luis German Restrepo, executive director in the United States for Proexport Colombia, a government agency that promotes

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both foreign investment and tourism. In Colombia, foreign investors get a 30-year income tax exemption for hotels built, remodeled or expanded by December 2017 — and this has helped fuel the introduction of some 11,000 new hotel rooms in the past seven years. In addition, Sergio Rodriguez, a Proexport investment representative, said the organization is focusing on attracting investors to segments where they see the greatest growth potential — namely, limited-service chains in small and medium-sized cities in Colombia. To assure continued growth for hotel investors, governments must also take an active role in developing infrastructure and promoting destinations, according to Ramón Mendiola, chief executive of Florida Ice & Farm, a Costa Rican food and beverage company that also owns the Westin Playa Conchal in Costa Rica. “Government must play an active role in the development of the infrastructure necessary to support the development of the hotel sector, from roadways, water supply and electricity, and

PHOTO: ©ISTOCKPHOTO.COM/ PHOTOCANAL25

SPECIAL REPORT: HOSPITALITY


SPECIAL REPORT: HOSPITALITY

the active promotion of the destination and attracting new flights to the nation’s international airports,” he said. As investors look for the “next big thing” on the travel and tourism map, they should keep in mind that it may not be an obvious choice, according to James E. Burba, president of Burba Hotel Network, a Costa Mesa, California-based company that produces and hosts Hotel Opportunities Latin America (Hola), a hotel investment conference that most recently took place this May in Miami. “One of our sponsors of the Hola conferences, Jones Lange Lasalle, is doing a study about what will be the catalysts of future growth,” he said, adding that secondary and tertiary cities are expected to fare especially well. “There are going to be places that will develop that you’ve never heard of. It’s like China — someone might mention a city with more than a million people and you’ve never heard of it.” Mark Chesnut reported from New York.

Adventure travel: The lower-maintenance market

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oncerns about lack of infrastructure and economic stability may squelch some investment plans in the travel and tourism sectors, but one particular segment — adventure travel — seems considerably lower maintenance in terms of its requirements. For investors and operators involved with adventure travel, a nation’s economic stability and infrastructure are “important, but nowhere near as important as for mass tourism,” according to Antonio del Rosal, the Mexico City-based executive director for Latin

America at the Adventure Travel Trade Association. “The adventure traveler usually travels in small groups, so you don’t need a massive airport to take care of the people coming into the destination, and that is a competitive advantage that Latin America has. We don’t need governments to make major investments in infrastructure. People are willing to jump in the back of a pickup truck in order to find a place that’s really unique.” Local partnering, however, may be more important — so it’s crucial for investors in this seg-

ment to make the case for their business plan’s benefits for the local community. “Some of the best preserved, most authentic and unique destinations are owned by indigenous communities,” del Rosal noted. “That’s something we can generalize about Latin America. For example, the Lacandon Indians in Chiapas are not tourism experts, but they do own the land. So you need someone to import the technology and the experience of the tour operators, and make it attractive to the local community, so that it can benefit the community.”

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COUNTRY REPORT: BRAZIL

ROARING AGAIN The Latin giant bounces back.

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ost people are still passionate about Brazil. The talk about lost opportunities is widespread, and the contrast with investor friendly and reformist Mexico has become all the more striking in recent months. But the Brazilian economy has proved resilient and become stronger. In dollar terms, it will soon catch up with the United Kingdom again and become the world’s sixth largest economy. This may happen as early as next year, and Brazil may become fifth when it overtakes France, an event that could happen in 2016, according to the Economist Intelligence Unit. “Brazil has lost much of its luster after the slowdown in 2011-12, and structural factors will keep medium-term growth outlook to only 3-3.5 percent. However, this performance is still stronger than in the UK and France. And, overtaking these economies will consolidate Brazil’s status as an economic superpower,” said Robert Wood, Latin America’s senior analyst at the EIU in New York. “That said, India will, in turn, in the longer term, overtake Brazil.”

DILMA’S DRIVE There was once a popular comedy entitled No Sex Please, We’re British that played for almost 20 years in London’s West End. Now, little more than 10 years after the left came to power, local policymakers could easily stage their own play called No Orthodoxy Please, We’re Brazilians. For the government that took office in 2003 following Lula’s landmark victory, has grown increasingly more confident.

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While shrugging off most market criticisms, President Dilma Rousseff has enjoyed record popularity ratings thanks to real income gains and low unemployment, despite high inflation. She looks determined to put Brazil back on the path to growth, following two disappointing years. Her government has made concessions to attract investors and unlock her flagship concession program in infrastructure. But do not expect any Mexican-style structural reform. More than ever, Brazil, which has surfed over the global financial crisis with a certain style, is determined to do things its own way. First is the development agenda. In very plain words, Rousseff recently explained that boosting economic growth is more important than fighting inflation. “This recipe that seeks to kill the patient instead of curing the disease is kind of complicated,” she said after the latest Brics meeting in South Africa. “Am I going to put an end to growth in the country? This is an outdated policy,” she declared. To some, this was hardly surprising. “Dilma indeed says what she thinks,” said David Beker, chief economist at Bank of America Merrill Lynch in São Paulo. In her election victory speech in October 2011, Rousseff did mention the will to let Brazilian interest rates converge towards international standards, and she later launched a war on bank spreads, while the central bank slashed its benchmark Selic rate (until last March). Rousseff later went on TV to announce cuts in electricity rates, while her government cut taxes on payroll, basic foodstuff and some durable consumer foods.

PHOTO: ©ISTOCKPHOTO.COM/ FELIPEGOIFMAN

BY THIERRY OGIER


COUNTRY REPORT: BRAZIL

Most of all, officials say the priority is to eradicate poverty. “The target to eliminate misery was completed in March. Thirty-six million people were living in absolute poverty in 2011. But we consider that now they all earn more than 70 reais per month ($35),” said Miriam Belchior, Brazil’s planning and budget minister, after the extension of social benefits that are part of the Bolsa Familia program. “To us, it is a matter of great pride, but as the president said, this is only the beginning.” Though financial investors have been taken aback by capital controls and state intervention, some bankers have acknowledged the progress. “The transformation of the past 10 years has been fantastic,” said André Esteves, chief executive of BTG Pactual, during a recent investors’ meeting. More than ever, scale matters. “Brazil’s share of Latin America’s GDP is equivalent to Mexico, Argentina, Chile, Colombia and Venezuela [together],” said Esteves, who reckons that the kind of development in Brazil is very similar to U.S. development. “It is a large country of continental proportion with a young and ethnically mixed population speaking the same language. And the greatest social mobility is in the U.S. and in Brazil, not in France or England,” he said. But somehow, many investors got cold feet, and gross fixed capital formation — a measure of investment — sank to a mere 18 percent of gross domestic product last year, despite changes in monetary and exchangerate policies. “There was a window of opportunity which opened already a few years ago, but Brazil did not take advantage accordingly. Looking at Latin America, it appears that investors look more towards Mexico in our days,” said Werner Stettler, corporate head at Zurich, the insurance company, in São Paulo. “Mexico’s growth comes mainly from industrial activities, but Brazil continues to live from commodities with an ongo-

PHOTO: ©ISTOCKPHOTO.COM/ LUOMAN

Rio-Niteroi Bridge

POWERFUL ATTRACTIONS

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n two years’ time, the sound of a locally assembled BMW sports car will be heard in Araquari, in the quiet southern state of Santa Catarina where the German manufacturer decided to invest 200 million euros to set up its first plant in Brazil. The size of the Brazilian market, as well as the purchasing power of the wealthiest part of the population, is proving hard to be ignored. Up north, the more popular Fiat brand is investing $1.5 billion in Goiana, near Recife – again well away from the traditional car manufacturing centers of Minas Gerais and São Paulo. It is a further move toward geographical diversification. Fiat has vied with Volkswagen for the position in the Brazilian market for years. And the 4.6 percent growth of sales last year means that Brazil has become Fiat’s main global market, ahead of Italy. Brazil has also been the main source of growth for

Daimler in its truck and bus divisions. With 13,000 trucks and 2,600 buses sold in the first quarter of the year, the country is expected to show a positive expansion of sales in an otherwise still market. Brazil is currently the world’s fourth largest market for cars, with 3.8 million units last year, and Carlos Ghosn, the Rondonia-born president of Renault Nissan, reckons that it may soon overtake Japan and become number three behind the United States and China. Brazil is already Renault’s main market outside France. Overall, a new automotive regime is expected to attract some 5.5 billion reais ($2.25 billion) in investment within five years. The regime grants fiscal incentives to manufacturers that intend to set up plants in Brazil, and capacity is due to exceed 6 million units by 2015, including trucks and buses, according to the Bndes development bank.

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COUNTRY REPORT: BRAZIL

“The development agenda seems to have remained stuck halfway through. My interpretation is that it has not received the support from the business community that could have been expected, especially in terms of productive investment.”

The automotive industry has been considered strategic since the 1950s when Juscelino Kubitschek was the nation’s president. It has remained a strong sector of the economy despite issues of competitiveness faced by the local industry, which has often sought – and gained – protection from the state. Brazil has also attracted a record amount of foreign direct investment in recent years in other industries. United Health entered the Brazilian health care market with a bang last October when it acquired 90 percent of Amil for some $5 billion. More recently, another U.S. company, CVS, agreed to pay an estimated $300 million

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to acquire the family-owned Onofre chain and compete in the fast growing drugstore market. CVS expects doubledigit growth in Brazil during the next decade, according to its chief executive, Larry Merlo. Brazil will pretty much remain in the limelight thanks to a series of major events of global impact, such as the 2014 FIFA World Cup and the 2016 Olympics, which will draw large crowds to the country. The sporting events are expected to generate business worth $11.25 billion according to Ernst & Young, which quotes a survey from the Getulio Vargas Foundation, a Brazilian research institute. In addition, a major

Catholic youth gathering for World Youth Day is to be held with Pope Francis this July. While there is concern regarding urban mobility and telecommunications, hotel groups have been quick to seize on the momentum. The 175-hotel Accor chain has strengthened its leadership thanks to the $275 million acquisition of Posadas, the Mexican group, last July, which included a luxury Caesar Park hotel in Ipanemal. “Our main growth engine used to be the budget hotels. It was a good strategy because 30 million new consumers came to the market. The Posadas acquisition has allowed us to achieve a balance with a new focus on the

upper end of the market and large cities in Brazil,” said Roland de Bonadona, Accor’s chief operating officer in Latin America. Brazil now expects to receive over 3 million tourists during the World Cup. The ambitious long-term plan aims to attract 10 million foreign tourists by 2022, twice the amount Brazil attracted last year. “Brazil is going to have over the next few years a media projection that no other country has had before,” said Vinicius Lummertz, secretary of tourism policy at the Brazilian tourism ministry. As far as tourism is concerned, this is certainly a golden opportunity.

PHOTO: ©ISTOCKPHOTO.COM/ CELSO DINIZ

André Singer, a political scientist from the University of São Paulo and Lula’s former spokesman


COUNTRY REPORT: BRAZIL

“It is hard to be moderate about Brazil. People either say it’s an Eldorado or they say it’s a disaster, but I think there is currently an excess of pessimism.” Louis Bazire, president of the Brazilian subsidiary of BNP Paribas

cent, not 4 percent or 5 percent... unless we have an investment boom,” said Beker, who nonetheless forecasts a 5 percent increase in investment in 2013 as a result of the more investor-friendly approach from the government in this regard. Brazil’s main problem will be to break this cycle of violent swings and ups and downs in economic activity, said Louis Bazire, president of the Brazilian subsidiary of BNP Paribas. “The real issue today is that we have had 10 years based on a model of income transfers. There has been an excessive boost to credit, especially in the automotive sector, which led to some corrective measures after a surge in non-performing loans. Now we are back to a more sound level. The consumption drive is still here, but we have probably reached the limits of this model,” he says. Meanwhile, the quest for sustained growth continues, amid passionate discussions. “It is hard to be moderate about Brazil. People either say it’s an Eldorado or they say it’s a disaster,” Bazire said. “But I think there is currently an excess of pessimism.” Meanwhile, Brazil is still lagging its peers in terms of income per capita, said the EIU’s Wood. “Here, Brazil’s progress will disappoint. Income per capita is currently only around $12,000 (around a third of those of the UK and France), and growing by 3-3.5 percent a year will not close the gap any time soon,” he said. Nevertheless, the ambitious President Rousseff has vowed to double GDP per capita by 2022, the year of the bicentenary of Brazil’s independence from Portugal.

PHOTO: ©ISTOCKPHOTO.COM/ BRASIL2

ing de-industrialization.” Despite its huge oil potential, Petrobras’ output has declined slightly since last year, and the former Bovespa blue chips, including Vale, took a hammering on the stock exchange. “The development agenda seems to have remained stuck halfway through. My interpretation is that it has not received the support from the business community that could have been expected, especially in terms of productive investment,” said André Singer, a political scientist from the University of São Paulo and Lula’s former spokesman. As a result, the government expected 4 percent economic growth last year and only got 0.9 percent. Perspectives may now look a bit brighter, but the growth potential is not as high as it used to be. This 200-million inhabitant country will probably accelerate its economic growth to 3 percent this year, according to the International Monetary Fund’s latest economic outlook, compared with 3.4 percent in Mexico and the Latin American average in 2013. Brazil’s growth is expected to outpace Mexico’s in 2014, according to the Fund (4 percent and 3.4 percent respectively, against a regional rate of 3.9 percent). Some analysts are still circumspect, although an investment push could make the difference. “The growth that we saw until a few years ago, which was 4 percent to 5 percent, was mainly due to the credit increase, which went from 25 percent of GDP to 53 percent of GDP, and to the China boom. But these two factors are gone. The new normal is 3 per-

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President Dilma Rousseff speaks during a ceremony announcing the investment program in airport logistics in Brasilia, Brazil.

KEY REFORM:

PORTS AND LOGISTICS

I

t was like a dawn raid. But there were no pirates. Hordes of stevedores and trade unionists climbed aboard a Chinese cargo ship in Santos to protest against the port reform announced by the government late last year. The package, which aims at cutting labor costs and boosting investment in new terminals, is a complement to a wider concession program for roads, railways and airports also unveiled in 2012. The spectacular protest, which was held amid huge cranes to be fitted in a new container terminal, lasted for 24 hours. The Chinese crew were scared, but there were no incidents. Workers managed to grab some privileges from the government, while officials expect to attract investment worth 54 billion reais ($27 billion) within five years and modernize the ports’ structure as part of what it has dubbed “a new port opening,” more than two centuries after the Portuguese opened Brazilian ports to foreign goods. Many private investors are optimistic. Antonio Carlos Sepulveda, chief executive of Santos Brasil, the country’s largest container terminal, sees many investment opportunities. “It is going to lead Brazil to greater competitiveness in international logistics,” he says. Productivity has already increased since 1997, when the terminal was priva-

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tized, from 11 container moves per hour to the current average of 85 moves per hour. But it is now time to think big, Sepulveda says, as he mentions plans for the development of private tool ports, which can handle various products while sharing the same infrastructure, such as the mega-port of Açu, in Rio de Janeiro. “We need to transform existing ports into large ports.” But, he also insists that the issue of labor costs has to be addressed. “There will be new terminals in Santos, but we need to improve competitiveness as a whole... Labor costs currently amount to 70 million reais ($35 million) per year for workers that handle containers, instead of 30 million reais ($15 million) in a comparable port to do the same thing. So actually, we do carry a bit of the cost burden that other terminals do not have,” he says. Santos, as well as the northern port of Belém, are high on the government concession priorities, to be completed this year.

LOGISTICS BLACKOUT Logistics bottlenecks extend far beyond the harbor. Only a few weeks after the stevedores’ protest, Santos, which is the largest port in Latin America, offered a rather depressing sight. The city and its roads were

overflowing with soybeans, as a result of this year’s bumper harvest of 183 tons of grain. There was simply no access to the port as 3,000 trucks lined up every day for over 15 miles or more before they could reach the export terminals. The whole area, just 43 miles outside São Paulo, was in shambles. Instead of harvesting the benefits of a record output, Brazil showed the world it simply was unable to cope. Chinese importers were not impressed. One of them, Sunrise, cancelled the shipment of 2 million tons of Brazilian soybeans. The Brazilian association of grain exporters, Anec, put the losses at $4 billion. Officials have again pledged some road works to improve the port access, although they will likely not be completed before 2015, according to Sepulveda, whose terminal was temporarily shut off by trucks carrying soybeans. “There are some solutions underway, but there will not be any actual solution if we do not use railways. At present, only 5 percent of containers reach the terminal by rail. We do not see any way out until in the future we use railway transport for at least 30 percent of container traffic,” he says. This is a competitiveness issue. “We compete with the U.S., where everything is shipped by train.” A lack of a good transport infrastructure also means that most of the grain harvest is currently being shipped to the ports of the south, while a large part of the output from Mato Grosso in the center-west of Brazil should be shipped to the less congested ports up north. However, this is not possible because the railway or waterway links have not been completed and the roads are in a terrible state. Some problems are old and are well known, but they have not been addressed satisfactorily. “Sometimes trucks still need to cross the railway line before they can reach the container terminal. We are in very bad shape,” says the consultant Luis Paulo Rosenberg, who denounces the lack of warehouses between the production site and the port, as well as the concentration in a limited number of ports

PHOTO: GLOBO VIA GETTY IMAGES

COUNTRY REPORT: BRAZIL


COUNTRY REPORT: BRAZIL

“The government has started to deal with these issues and try to sort them out, but there is no illusion that this will be dealt with in the short term.” Roberto Rodrigues, a former agriculture minister

and roads in bad state of conservation. And the Santos mess was not only confined to land traffic. At the other end, more than 40 ships were waiting to enter the port everyday at the peak of the logistics blackout in March. The port is like a funnel. We need to broaden this funnel. This is the logic behind the new port reform. It’s what is going to drive the process of improvement of logistics structure,” says Roberto Rodrigues, a former agriculture minister and one of the most powerful advocates of agribusiness in Brazil. He is convinced that Brazil’s emergence as an agricultural superpower is good for the world at large. “If you look at an Ocde

survey launched in 2011, the world needs to increase its food production by 20 percent by 2020 – and Brazil is the only region that can increase it by 40 percent. There is a clear horizon, and Brazil has three competitive advantages here: availability of land, tropical technology and human resources. But these advantages are limited by infrastructure, by trade policy which is still very shy, by limited insurance and credit in rural areas.... We have a series of restrictions, but if we address these issues of logistics, we will be a very important power,” he says. “The government has started to deal with these issues and try to sort them out, but there is no illusion that this will be dealt with in the short term.” The former Cardoso minister also advocates an aggressive trade diplomacy to export more value-added products. “We cannot just rest on our laurels and just be the champion of export commodities... China wants to buy soybeans and add value at home. Brazil’s exports of green coffee account for almost a third of total world coffee exports, but less than 3 percent of processed coffee, while Germany and Italy continue to dominate the world market,” he says. All of this may sound familiar. And in a way it is. But, Brazil will have to deal with these issues before it can be considered a world economic power. Thierry Ogier reported from São Paulo.

PHOTO: NELSON ALMEIDA/AFP/GETTY IMAGES/NEWSCOM

Port of Santos in Brazil

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POLICY AGENDA: PUBLIC SPENDING

Many countries in Latin America do not have the adequate mechanisms or an efficient infrastructure to invest public money. Rodrigo Chaves, director for the reduction of poverty and economic management at the World Bank.

mies. This is known as the countercyclical policy, in which governments save money during economic good times, and spend more during the bad times.

TIME TO SPEND Latin America has a golden opportunity if it activates the public spending machine and makes it efficient. BY JAIME MEJÍA

W

ith a per-capita income of $2,020, well below the region’s average of $8,574, according to World Bank figures, Bolivia is one of Latin America’s poorest countries. However, an equivalent of 25 percent of the country’s Gross Domestic Product (GDP) remains frozen in fiscal reserves in the municipal governments’ coffers because the nation lacks the capacity to effectively spend the funds. Though a bit extreme, this case showcases the challenges many Latin American countries face when it comes to using public funds, says Rodrigo Cháves, director for the reduction of poverty and economic management at the World Bank.

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According to Cháves, governments in the region have historically focused more on cutting budgets than on public spending. With the economic crises of the 1980s and 90s, finance ministries in the region became quite skilled at cuts due to the need to reduce deficits. “Since 2003, macroeconomic conditions have improved and the countries have begun to focus more on improving the government’s spending capacity,” Cháves says. With the global economic meltdown of 2008, many countries around the world – including those in Latin America – realized that they needed to use public spending to boost their econo-

Latin America is not a homogeneous region when it comes to the topic of public spending. According to Guillermo Perry, former chief economist at the World Bank, there are countries that are very efficient in spending, such as Chile, Uruguay and Costa Rica. Others do so at an intermediate level, such as Mexico. Still others are not as efficient, such as Colombia, Brazil or Venezuela. Perry adds that the Chileans have developed a very effective government, with low corruption levels and a project-evaluation model that works well at elevating the quality of publicly-financed projects. Meanwhile, Brazil is a symbol of inefficiency. Still, Perry warns against making an across-the-board generalization about the country, pointing the high efficiency of state-owned oil company Petrobras. There are isolated cases of efficient public spending in almost every country. Those that have savings models outperform in the discussion about the efficiency in spending public money. This has been particularly important in recent years with the boom in commodity prices, which brought windfall

PHOTO: ©ISTOCKPHOTO.COM / SKODONNELL

BIG DIFFERENCES


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PHOTO: ©ISTOCKPHOTO.COM / DIGITAL PAWS INC.

POLICY AGENDA: PUBLIC SPENDING

revenues to many countries. This has in turn introduced some macroeconomic problems, such as a rapid appreciation of the currency that increased the cost of local goods and negatively affects the exporting industry. Chile has traditionally been a role model for the region. The country has a system that allows it to save in economic good times, such as the one experienced in recent years with the increase of metal prices. Nevertheless, these savings models assume that whenever the rainy days come, governments must speed up the spending machine. “Many countries in Latin America do not have the adequate mechanisms or an efficient infrastructure to invest public money”, says Cháves, from the World Bank. Sometimes this responds to an excess of orthodoxy. “We have a huge amount of available resources, but also an institutional framework of controlling bodies dedicated to obstructing spending due to fears of misuse and corruption. This is healthy, but not to the extreme of paralyzing the key agencies for infrastructure and social spending,” said former minister of finance in Colombia, Juan Carlos Echeverry.

REVENUE IS INCREASING Low spending execution capacity in many countries is in conflict with the fact that

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government revenues have increased significantly in recent years. According to a study of the United Nation’s Economic Commission for Latin America and the Caribbean (Eclac), Latin America’s fiscal incomes rose from 19.6 percent of GDP to 23.6 percent of GDP between 2000 and 2011. In the Caribbean, this was from 24.5 percent to 28.3 percent of GDP. The tax burden (including social security contributions) also increased, from 12.7 percent to 15.7 percent of GDP over the same period in Latin America. In the Caribbean, the tax burden went from 19.3 percent to 23 percent of GDP. This increase owes to economic growth and the rise in commodity prices, says Eclac. Other factors played a role, including the creation of new levies on financial transactions, lower withholdings, and the reduction of inequality in conjunction with the increase of consumption. According to the Eclac, in those countries specialized in the exploitation of non-renewable natural resources there was an increase in both the government take in economic rents, as well as in the contribution of sectors exporting such resources (minerals and hydrocarbons). Between 1999 and 2011, the revenue from the exploitation of primary goods as a share of GDP rose by 7.2 percentage points in Ecuador, 4.5 points in Bolivia, 3 percentage points

in Argentina, 2.9 in Chile, 2.2 points in Colombia, and 1.4 in Mexico and Peru.

AN OPPORTUNITY In the global context, Latin America remains one of the regions with the highest potential, especially given the economic situation in developed economies. According to the World Bank’s Cháves, Latin America should grow about 3.5 percent this year - this is far from insignificant considering the current global economic outlook. To Cháves, this is a great opportunity for Latin America to invest in infrastructure and other areas that improve competitiveness. “In fact, I believe that the main problem in the region today is that we are lagging behind in improving factor productivity,” he says. This, precisely at a time of very favorable access to equity and of low interest rates. Besides, when rightly directed, those public funds could help to reduce income inequality. In fact, to Juan Carlos Echeverry, the most socially productive action over the next year would be to increase spending so that it effectively reaches the poor, rather than keeping it locked up in reserves. Is this a topic to elevate in the public policy agenda priorities? No doubt about it. Jaime Mejía reported from Miami.


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TECHTRENDS

LATIN AMERICA

TECHS UP

New technologies like big data, cloud computing and social media are transforming business in Latin America. Companies are using them to boost revenues, trim costs and gain more customers.

I

n healthcare, a call center agent can sometimes strain to decipher an emergency. A patient may not know how serious his pains may be. Gustavo Aguirre, the CIO at private health insurer Grupo Osde in Argentina, is implementing technology to ease this process. An agent taking a patient’s call will still ask questions and input what is said. Then a rules engine – software capable of inferring logical consequences from a set of data – will process the information and determine how quickly a doctor should be dispatched on a house call, putting that case ahead of others if urgent. “This improves the quality of our services,” Aguirre says. “It reduces errors.” Rules engines are an example of how new technologies like big data, cloud computing, mobile and social media are transforming business in Latin America – and around the world. Companies are using them to improve their capabili-

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ties for marketing and operations, and to boost revenue, trim costs and gain more customers. These technologies are making noise in Latin America, yet wide implementation is still “a couple years away,” says Rodrigo Slelatt, who follows these trends at A.T. Kearney, a New Yorkbased management consulting firm. Most companies are still focused on enterprise resource planning, he says. They are integrating all the parts of their organizations – accounts payable, customer databases, human resources, order-tracking systems and so forth – into a network that can be accessed and updated by employees all the time. Nevertheless, steps are being taken, the first being in cloud computing, or renting computing capacity, and applications over the Internet. The benefits are clear. For one thing, it costs 10 times less than acquiring servers and software licenses, says Slelatt.

Another advantage is availability. “Cloud computing is a great way to provide people more immediate access to vital information such as a sales rep who needs information right away about a customer’s contract or deal status,” says Joe Ruck, CEO of Menlo Park, Californiabased BoardVantage, which provides secure online platforms for leadership communication. Traditionally, firms order a server for more capacity and then the software for new applications, a process that can take six months to a year. “Cloud has cut these cycles,” says Octavio Osorio, the vice president for Latin America at EMC, a U.S.-based information management company. Providers of cloud-computing services like Amazon, Google and Microsoft handle the hardware and users pay a subscription. What took months, now takes hours. “Cloud technology gives you greater velocity to implement your business strategy,” says Osorio.

PHOTO: ©ISTOCKPHOTO.COM/ TEEKID

BY CHARLES NEWBERY


TECHTRENDS

This is putting companies on their toes. Smaller companies can now purchase the same technology once only affordable by larger firms, he says. At Grupo Osde, Aguirre says demand is rising within the company for flexible solutions capable of processing information in real time so managers and employees can make quicker and more precise decisions. To do this, he has had to change his way of thinking. “To design flexible solutions, you have to think in abstract, to think of solutions that are adaptable to future demands,” he says. “If the business has to adapt, my processes and solutions have to adapt as well.” Nor can computer systems just process operations anymore. “They have to have capacity to make decisions,” Aguirre says. “They have to be able to review different scenarios and choose one which is the best.”

WHAT’S THE PAYBACK? CIOs may be clever at technology, but now they also have to become experts in their company’s business and learn how to boost returns with computing power, says Gerardo Gramajo, who runs SkyOnline’s data center in Buenos Aires. “Technology must resolve problems that allow a company to earn more money,” he says. “Technology for technology’s sake is not worth it.” Nevoa Networks helps find such solutions. TecBan, which operates ATMs and transports money in Brazil, turned to the Recife-based data management company to find storage for backup camera footage from its armored trucks. Nevoa used virtualization to pool idle disk space on 200 desktop computers so it can be managed centrally. “This provides security without additional costs on infrastructure,” says Hunter Hagewood, a co-founder of Nevoa. In Buenos Aires, Mariano Suárez Battan says cloud computing has sped up the development of Mural.ly, a startup that allows users to share projects in real time on a virtual whiteboard. “We use java script in the cloud, which makes everything very nimble,” says the CEO. “Instead of doing a release every three months, we can do one every 15 minutes.” Find a bug? No problem. “We fix it and it’s online right away.”

GETTING MOBILE Mobile is another movement. David Eads, a mobile commerce veteran and founder of U.S.-based consulting firm Mobile Strategy Partners, de-

scribes the global push into mobile as an arms race. Latin America is no exception. In February, Itaú Unibanco, Brazil’s second-biggest bank, launched a service that allows customers to wave their smartphones close to a payment terminal to buy everything from a coffee to a pair of jeans. “All the banks have mobile solutions in Brazil, and they are not sitting still,” Eads says. They are finding ways to arm branch employees with mobile capabilities so they can help investment bankers tap the wealth groups, he says. Retailers also are experimenting. First came the use of mobile to speed up shelf stocking and reduce friction in the supply chain. Now Eads says they’re looking at mixing mobile payments with coupons and loyalty programs, and next could come “line busting,” or allowing shoppers to complete purchases on their mobile phone without waiting to get it rung up. In the office, the falling cost of Android smartphones is spreading their use and the creation of applications so that airline mechanics can carry repair manuals on them. District managers can check stocks at stores while on the fly; oil workers can file trouble tickets right from the well. This may be “cutting edge,” Eads admits. “But it’s not risky; it’s good business.” Social media offers similar opportunities. It expands the number of channels for firms to reach customers and brings with it a wealth of data, says Michael Widjaja, who consults companies on technology in Latin America as a managing director of Accenture. “You can know more about the customer through social media, so you can offer a more specific service,” he says.

BIG DATA Social media is possible thanks to cloud computing, and mobile is expanding social media. These automatically produce machine data, or categorical logs and records. Ignored for years, technology is now available to mine the data for corollaries that can provide operational intelligence. “When somebody goes to a website, I can see the customer’s behavior and then see if they have a slow response or a problem,” says Jeff Hodges, director of channels for the Americas at Splunk, a San Francisco-based company that monitors, collects and indexes the data in real time so clients can improve operations. “Then I can correlate this with social media to see what they buy and what they say about what they bought.” PagSeguro is doing something of the sort.

The Sao Paulo-based company tapped Splunk to consolidate data from its online payment services in one place to meet security compliance. Soon, they realized they could use the information to manage their services, helping to reduce service response and troubleshooting times. PagSeguro now is correlating “marketing and customer information to see if its advertising and sales campaigns are effective,” Hodges said. Mining big sets of data can uncover even minor solutions with big payoffs, he says. For example, looking at the data for a dimmer switch, a Splunk user found a 1 percent savings in power consumption. In making a jet engine, such a discovery can save $10 billion. Or on a locomotive, $60 billion, Hodges says.

CHALLENGES There are challenges for the deployment of these technologies. Few companies are training their IT staff in their use, nor are universities, says Nevoa’s Hagewood. That means the expertise likely will come from startups. Intel Capital, the investment arm of California-based semiconductor chip maker Intel, invested in two such ventures in February: Brazil’s Geofusion and WebRadar. The former helps clients to map out expansion by analyzing market data based on geography, such as the best location to open a new McDonald’s restaurant. WebRadar helps clients mine big data to improve operations. Martín Frascaroli runs another: Argentina’s Aivo. It designs virtual assistants for round-theclock customer service without employees. The assistant fields questions over a corporate website, Facebook and elsewhere. Got a question about Fiat’s newest model and how much it costs? Ask Luigi, its virtual assistant. You can also ask him if he likes pasta or pizza best, how he’s doing and, well, what he thinks of Fiat CEO Sergio Marchionne. There’s no waiting on the phone to get cut off all of a sudden, or for a customer service rep to bumble out a feeble response. Frascaroli is now working on voice-recognition virtual assistants for mobile phones, smart TVs and hologram projection. He says the generations growing up connected to the web will demand such services – and even more. “There’s going to be more focus on the value of time and not wasting it,” he says. “Technology will need to respond.” Charles Newbery reported from New York.

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BRAVO COUNCIL LIMA

Marcos Aguiar, Head of South America, Senior Partner & Managing Director, The Boston Consulting Group; Roland Loehner, SVP, The Boston Consulting Group; Rodrigo Rivera, Partner & Managing Director, The Boston Consulting Group; Jorge Becerra, Senior Partner & Managing Director; The Boston Consulting Group; Nuno Monteiro, Senior Partner & Managing Director, The Boston Consulting Group

Gastón Acurio, Chef and Ambassador of Peruvian Cuisine; President, Acurio Restaurantes; Luis Miguel Castilla, Minister of Economy and Finance, Peru; Richard Burns, Chairman, Latin Trade Group

PUBLIC-PRIVATE PARTNERSHIPS TOWARD A BETTER FUTURE Securing economic growth as well as sustainable development requires shared collaboration and accountability between government, the private sector and society. “Public-private collaboration for impact” was the topic of Latin Trade’s BRAVO Council in Lima in April.

Sylvia Desmaison, Sustainability & Communications Analyst, Latin America Beverages, PepsiCo; Mariela González, Manager & Senior Executive Assistant, PepsiCo; Luis A. Montoya, President Latin America Beverages, PepsiCo; Gabriela de la Garza, Sustainability Manager, Latin America Beverages, PepsiCo

Michael McAdoo, VP Strategy & International Business Development, Bombardier Aerospace; Ricaurte Vásquez, Vice President of Government Affairs and Public Policy Latin America, General Electric Company; Antonio Capellini, Managing Director Andean Cluster (Perú, Chile & Colombia), Goodyear

J

Michael Raney, Chief Executive Officer Global Corporate, Zurich Latin America; Ramiro Prudencio, President & CEO Latin American Region, Burson-Marsteller

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Craig Smith, President of Caribbean & Latin America, Marriott International

Nelson Ortiz, Managing Director and Chairman, Incus Capital; Albina Ruiz, President, Grupo Ciudad Saludable; Mireya Cisneros, President, Fundacion Venezuela Sin Límites; Gustavo Sorgente, General Manager, Central America, Northern South America and Caribbean, Cisco

PHOTOS: ALONSO MOLINA

orge Becerra, Senior Partner at The Boston Consulting Group, led discussions at our BRAVO Council in Lima this year. Before an audience of high-level business and government leaders, Peru’s Minister of Economy and Finance Luis Miguel Castilla provided concrete examples of and ideas for public-private partnerships in infrastructure development, innovation, and social entrepreneurship. Luis Montoya, President of Pepsico for Latin American Beverages, reflected on the need of trust-building between government and business. Michael Raney CEO for Latin America for Zurich Seguros analyzed a case of disaster prevention which saves large amounts of social resources. Finally Gastón Acurio, the person who single-handedly led a movement that positioned Peruvian cuisine as one of the most renowned in Latin America, gave a detailed account of his success story, which he refers to as a revolution which permeated that country’s social fabric with ideas of innovation, education, inclusion and efficient production. Joseph Mann reported from Miami.


PANAMA BRAVO COUNCIL

Julio Velarde, Governor, Central Bank of Peru; 2012 BRAVO Distinguished Service of the Year Award

Herman Bern Pittí, President of Empresas Bern

Alejandro Díaz de León, Deputy Undersecretary for Public Credit, Ministry of Finance and Public Credit of Mexico; Enrique García, President and CEO, CAF – Latin America Development Bank and 2009 BRAVO Business Awards Financier of the Year; Richard Burns, Chairman, Latin Trade Group

FINANCING THE LATIN AMERICAN DECADE

Maurice Bélanger, Executive Director, American Chamber of Commerce & Industry of Pánama; Maurice Bélanger, Executive Director, American Chamber of Commerce & Industry of Pánama

Mobilizing capital for the ‘Latin American Decade,’ was the topic for the Latin Trade BRAVO Council event in Panama on March 15.

PHOTOS: IDELFONSO MARÍN

I

n order to continue growing at accelerated rates, the countries of Latin America need easy and efficient access to capital sources. Funds are needed not just for regional connectivity and infrastructure development, but to fuel corporations - large, medium and small – which will drive job creation and economic development. The issue of capital access was addressed by the speakers at Latin Trade Group’s BRAVO Council in Panama this year, which included such luminaries as the Andean Development Corporation (CAF) President Enrique Garcia, and Peruvian Central Bank President (and past BRAVO Award winner) Julio Velarde. Discussions were moderated by Latin Trade Group Chairman Richard Burns. The speakers agreed that access to capital will be key in driving growth in the next decade, and should be a priority of business and government. The access will be necessary not only for the private sector, but also in the public sector’s drive to improve infrastructure and development. The discussion helped to develop the program for the Latin Trade Symposium. prior to the BRAVO Business Awards, which will take place on October 25 in Miami.

Rigoberto Espinosa, VP of Finance, Manzanillo International Terminal-Pánama, S.A.

Frank Holder, Chairman, FTI Consulting; Julio León-Prado, President, Banco BISA S.A.

Robert Chandler, Partner, Sánchez Devanny; Enrique García, President and CEO, CAF – Latin America Development Bank and 2009 BRAVO Business Awards Financier of the Year; Carlos González-Taboada, VP & CEO, Scotiabank

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LT CFO SÃO PAULO

Marcela Drehmer, CFO, Braskem

Marcelo Martins, CFO & Investor Relations Officer, Cosan; Mark Ludwig, Contributing Editor, LT CFO Events, Latin Trade Group

Emmanuel Baltis, Vice President, Customer Distribution & Marketing, Zurich Latin America; Michael Raney, CEO, Zurich; Rodrigo Purchio, Corporate Strategy Manager, Volkswagen Brazil; Federico Bove, Executive Vice President, Datarisk Global

T

he Brazilian government has become more investment friendly as it launched a series of concessions in roads, railways, airports, and tentatively, ports. “Even though it was not a sea change, the situation is improving and there is now a good chance that investment will increase by 5 percent this year,” said David Beker, chief Brazil economist and fixed income strategist at Bank of America Merill Lynch, during the Latin Trade CFO Forum held in São Paulo, April 10. Beker forecast GDP growth to increase from 3 percent to 3.5 percent this year against a background of modest economic growth in the U.S., a soft landing in China and still some tail risks stemming from the European crisis. There

are domestic risks, too, he implied. Brazil already has an inflation issue, and its fiscal accounts have been deteriorating. “The balance between growth and inflation has deteriorated a lot,” he said although he ruled out a Turkey-like or Argentina-like scenario. In spite of repeated pledges to lift the investment rate to more than 20 percent of GDP, efforts have so far been frustrated and this key indicator fell to 18 percent of GDP. Marcelo Martins, CFO of Cosan, received the Latin Trade CFO of the year award after his company “increased its revenues by more 700 percent and its EBITDA by 500 percent within five years” while managing an intense acquisition and diversification process.

David Beker, Chief Brazil Economist & Fixed Income Strategist, Bank of America Merrill Lynch

LATIN TRADE MAY-JUNE 2013

Vincent Eavis, Practice Lead and Management Director, PayTech Commercial

Rogério Menezes, Finance Director, Akzo Nobel Ltda.; Marina Negrisoli, Treasury Manager, Fibria; Sergio Malacrida, Treasury General Manager, Fibria

Wagner Birochi, Treasury Manager, Syngenta; Wilson Ferreira, Exportation Director, MITSUI Alimentos

CONNECTING LATIN AMERICA’S CFO COMMUNITY

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Alexandre Dinkelmann, Executive VP of Strategy and Finance & Investor Relations Officer, TOTVS

Luis Emilio Fortou, Global Commercial Expansion Team, Latin America and Caribbean Region, Visa Inc.

PHOTOS: NEWTON MEDEIROS

INVESTMENT GEAR

Daniel Levy, VP of Finance and Management, TAM


LT CFO BUENOS AIRES

Sergio Berensztein, President, Poliarquía Consultores; Mark Ludwig, Contributing Editor, LT CFO Events, Latin Trade Group; Luis Emilio Fortou, Global Commercial Expansion Team, Latin America and Caribbean Region, Visa Inc.; Claudio Fiorillo, Socio Director Financial Services Industry, Deloitte & Co. SRL

Roberto Lavagna, Former Minister of Economy and Production of Argentina (2002-2005), and 2003 BRAVO Innovative Leader of the Year

igh commodity prices and global liquidity can be a blessing for Latin American economies, but not all are taking advantage of this situation. This was part of the remarks by former Argentine Economy Minister Roberto Lavagna at a regional CFO Forum in Buenos Aires in April. While countries like Colombia, Peru, Chile, Uruguay, and Paraguay have been profiting from this situation, others such as Venezuela and Argentina have chosen a populist path that has already failed in the past. Their wealth distribution efforts are being undermined by high inflation that is eating up worker’s income, he warned. Market unfriendly policies, including nationalizations and forex controls, are also scaring off investors, Lavagna said.

But for both groups of countries, the most important thing is to bring costs down, CFOs agreed. Xerox Argentina’s CFO Dario Burstein said one way to do it is by reducing back office costs. His company has expertise in document digitalization, a solution capable of bringing down data storage and managing costs by up to 70 percent, he said. Ignacio Sanz of BBVA said digitalization goes hand in hand with outsourcing, another key area that can help reduce costs in the always challenging Latin American business environment. In the past, he would worry about cloud computing. “Now we upload the emails of our 120,000 employees around the world,” he stressed. “Digitalization and outsourcing—this is the future.”

Gabriela Rovere, CFO, Chrysler Argentina

Fernando Gabriel Labate, Controller, Pepsico Bebidas; Ileana Zapata, Controller, Medix/Natus

Rubén Ramirez, Director-Representative in Argentina, CAF-Development Bank of Latin America; Félix El Idd, Presidente, Datarisk Global

PHOTOS: MARIANO LÓPEZ

THE COST IMPERATIVE H

Gustavo Martinez, CFO, IMPSA Pescarmona; Gerardo Médico, CFO, ARCOR

Sergio Berensztein, President, Poliarquía Consultores

CONNECTING LATIN AMERICA’S CFO COMMUNITY LATIN TRADE MAY-JUNE 2013

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SPOTLIGHT

FACT SHEET Name of the campaign: “Duster walkers” Advertiser: Renault Argentina Product: Renault Duster Agency: Publicis Country: Argentina

How to liven up a Renault BY PAULA ANCERY

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uyers of 4x4 vehicles use them much more for traveling around the city than for rural settings, although that’s what they were designed for. People choose them because they like them and because it’s the style, even though they drive mainly in the city and only rarely venture into the countryside. Market studies have shown that the Ford Ecosport was mainly used in urban areas, and that, despite its name, it was designed more for pavement than for off the beaten path. The debut of the Renault in the 4x4 market segment took place in 2011, with the Duster. “Looking into it, we found that the Duster was made for going out into the country, for getting dirty, for climbing mountains,” says Fabio Mazía, general director of creativity for Publicis Argentina, together with Marcelo Vergara. “The challenge was to present this in a way that was relevant and entertaining for the public.” Thus was born “Duster Walkers,” the spot that was the figurehead on the prow of the campaign that also included radio, billboards and Facebook. The commercial has a standard version of 60 seconds – a luxury in a country where 30 seconds is considered a long time – two spin-offs of 20 seconds, and another one of 98 seconds for the Internet. Duster walkers are nothing more than the automotive version of dog walkers. Although you might take any mongrel out for a walk to work off its energy, choice becomes necessity when the dog exhibits an impressive demeanor. As one of the actors in the commercial says,

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“A Duster in the city is like a bird in a cage. If you free it, you don’t know what you’ll discover.” Another commercial, emphasizing the parallels of the vehicle with the dog that needs to work off its energy and play: “We go and find the Duster in the house, and we take it to the mountains, to the unpaved roads, where he gets muddy and dirty …” Another explains it as a vocation: “I take four or five to walk them together, on good walks.” “We are basing it on a real insight,” says Mazía. “Comparing the Duster with a dog gives it the feeling of affection. Even though it’s a machine, it looks like Dusters have needs as if it were alive, which is good in a market segment like the automotive, which can be rather cold.” The film and the performances give way to a “freak-out” which moves between comedy and tenderness. And so, a boy demonstrates the steering wheels he has prepared so that he can be retained as a Duster walker; another one invents a jingle; another refuses a customer because all of his time slots are filled. “We thought it was going to be pure comedy, but as we developed it, we ended up with a more tender film that isn’t looking for laughs or gags, but instead has a more intimate tone, which works well for the spot and the product,” explains Mazía. Renault is currently the third largest automobile company in terms of sales in Argentina, and aims to become the leader in the competitive SUV segment, with its Duster, Sandero Stepway and Koleos.

Locally, cars lost their prominence after the mid-1990s, when they were displaced by telecommunications. But little by little, they are again becoming one of the top categories. “You have to take into account that the automobile industry in Argentina took a huge hit after the 2001 crisis. Now, it’s slowly recovering. In the case of Renault, it has renewed its entire range, launched new models in 2012, and is a player in almost all segments. The company is growing and as it does so, its publicity grows too,” says Mazía. Paula Ancery reported from Buenos Aires.

PHOTOS: PUBLICIS ARGENTINA

THE DUSTER WALKERS

TECHNICAL CREDITS FOR THE PIECE: General creative directors: Fabio Mazía / Marcelo Vergara Creative directors: Laura Visco / Sebastian Visco Editing: Leandro Ezquerra / Laura Visco Art Direction: Estefanía Pecora / Sebastián Visco Agency production: Mariana Lorschy Equipment accounts: Fabián Wencelblat / Natasha Yasbitzky Company Producer: PRIMO Direction: Felipe General Production: Victoria Piantini Executive Production: Carolina Cordini Photographic Direction: Nicolás Trovato Editing: Federico Peretti Post-production direction: Sebastián López / Majo Villalba Sound: NotDeaf Sound Design Musical band: Animal Music Authorization by the client: Laurent Didot, Marcelo De Carlo, Luis Müller Other credits: Color correction: Cinecolor (Daniela Ríos)


TECHTRENDS

MAY-JUNE 2013 LATIN TRADE

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Latin Trade (English Edition) - May/Jun 2013