Part four Latin America

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					                                    November 23 2010

Part four: Latin America

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international business insight | overview

                                                                                                             No longer the man

                                                                                                             Latin America has shaken off the clichés to become a dynamic

2    overview
     Latin America may be playing on the world
     stage, but problems remain
4    finanCe
     How private pension funds could ride to the
     rescue of Mexico’s medium-sized businesses
6    Challenges
     Brazil’s companies are expanding across the
     region after a wave of investment
8    regional trade
     Trade accords and regional agreements
     remain unresolved in the quest for a
     unified continent
10   Case studies
     The stories of three businesses that found
     winning formulas in a tough environment
11   Comment
     The region’s future prosperity relies on its
     ability to increase creativity and innovation

     VINCENT BEVINS is an FT contributor
     ANDREW DOWNIE is an FT contributor
     BENEDICT MANDER is the FT’s Venezuela
     NAOMI MAPSTONE is the FT’s Andean
     JOHN PAuL RATHBONE is the FT’s
     Latin America editor
     ADAM THOMSON is the FT’s Mexico
     JuDE WEBBER is the FT’s Argentina and
     Chile correspondent
     Brazil correspondent

     Special reports editor Michael Skapinker
     Editor Hugo Greenhalgh
     Lead editor Paul Solman
     Production editor Riaan Wolmarans
     Sub-editors Alistair Hayes
     Art director Derek Westwood
     Visual consultant Ed Robinson
     Picture editor Lindsay Cameron
     Graphics Russell Birkett
     Research John Geddie
     Global head of strategic sales Jon Slade
     Head of integrated solutions Patrick Collins
     Senior campaign manager Rachel Harris
     Head of professional services Robert Grange
     Advertising Damian Douglas, Daniel Trevett,
     Ceri Williams

     All editorial content in this report is produced by the FT.
     Advertisers have no influence or prior sight of the articles.

                                                                                                                      F YOu HAVE FLOWN ON A REGIONAL              largest bakery, behind Japanese-based Yamazaki
                                                                                                                      airline in Europe or the uS recently, it    Baking and uS-based Nabisco, part of Kraft. With
     on                                                                                                        is quite possible you were sitting in an    more than 91,000 employees worldwide, Grupo
                                                                                                                      Embraer aircraft – designed and built in    Bimbo operates in more than 18 countries, selling
     videos: Adam Thomson                                                                                             Brazil. If you have eaten grilled chicken   English muffins, white bread and ready-made
                                                                                                                      on the Fourth of July at a barbecue in      pizza crust across the uS and baked goods as far
     reports on the growing                                                                                           the uS, the poultry could well have been    afield as Europe and China.
                                                                                                                      provided by Pilgrim’s Pride, majority-         Or there is the Guatemalan restaurant chain
     number of companies in                                                                                  owned by JBS, the Brazilian meat processor.          Pollo Campero, which has spread from its home
                                                                                                                And if you perhaps drank a Budweiser at that      base to employ more than 7,000 people working in
                                                                     PHoTo: corBis; cover iMAge: oNeredeye

     Mexico looking south for                                                                                barbecue, nowadays that is a slice of Brazil as      more than 260 restaurants worldwide, with outlets
                                                                                                             well. The iconic American beer brand belongs to      in Spain and Asia that clearly appeal to diners
     opportunities, and Jonathan                                                                             Anheuser-Busch InBev, the $37bn Belgian-             beyond the company’s Hispanic roots.
                                                                                                             headquartered company, most of whose top                Clearly, the rise of emerging economies in
     wheatley interviews                                                                                     managers call Brazil home.                           the world order is not just reshaping geopolitical
                                                                                                                These are just three of the growing band of       questions; their companies are changing global
     welber Barral, Brazil’s                                                                                 Latin multinationals dubbed “multilatinas”. It is    business patterns, too.
                                                                                                             no accident they hail from Brazil, which accounts       Generally, multilatinas are aggressive
     foreign trade secretary.                                                                                for roughly half of Latin America’s economy          enterprises that are a by-product of the market
                                                                                                             and population. But multilatinas are common to       liberalisation that swept Latin American                                                                                          Spanish-speaking Latin America as well.              economies in the 1990s. Battle-hardened by
                                                                                                                Mexico’s Grupo Bimbo is the world’s third-        that liberalisation, they then opportunistically
                                                                                             international business insight | overview

with a moustache and a guitar
global player, but the region still has problems to overcome, writes John Paul Rathbone

                                                       gaining altitude:        their knees, thanks to its trade links with Asia,       formalism than firms in the shadow economy,
                                                       são Paulo in brazil, a   Latin America’s economies were broadly unhurt.          but at the same time struggle to absorb the social
                                                       country that accounts    Although the region, forecast by the International      security and other payments that, in Brazil, for
                                                       for about half of        Monetary Fund to grow by 6 per cent this year,          example, can double employment costs.
                                                       the economy and          does not quite match Asia’s dynamism, it has               Meanwhile, some governments’ near-
                                                       population of            become a very different place from the clichés          impenetrable bureaucracy “can act as a barrier
                                                       latin america            so often used to describe it in the past: a place of    to entry to foreign competition and executives”,
                                                                                macroeconomic instability and sluggish business,        says Bill Cooke, professor of management
                                                                                or “a man with a moustache and a guitar and a           studies at Lancaster University. It also increases
                                                                                revolver”, as Gabriel García Márquez, the Nobel         the transaction costs for small companies.
                                                                                Prize-winning author, once characterised common         For example, the tax affairs of a typical
                                                                                European perceptions of the continent.                  Brazilian company require on average 2,600
                                                                                   Martin Sorrell, head of WPP, the advertising         hours to complete every year.
                                                                                agency, has said the 2010s could be the decade of          SMEs share some of the traits of multilatinas,
                                                                                Latin America. The World Bank has praised its           especially family ownership, as can be seen in
                                                                                prospects. In an ebullient recent report entitled       Colombia, where mid-sized family-controlled con-
                                                                                The New Face of Latin America: Globalised,              glomerates dominate the corporate landscape. But
                                                                                Resilient, Dynamic, the bank said past crises           they also often lack the thrusting aggression of
                                                                                had immunised the region, so that during this           their bigger peers. A well-developed sense of risk
                                                                                financial crisis, while advanced economies caught       aversion is natural, given the region’s history of
                                                                                pneumonia, Latin America “only got a cold”.             instability: Colombian companies, for example,
                                                                                   Today, worry-worts at the International              tend to eschew debt finance.
                                                                                Monetary Fund fear the greatest threat to Latin            But such prudence can also be a good thing,
                                                                                America is that it is growing too fast. The IMF         especially when multilatina ambition is allied
                                                                                warning raises the disturbing prospect that the         with an occasionally grandiose sense of historic
                                                                                region could yet return to the boom-and-bust            mission. As another IADB study put it, it was
                                                                                cycles of the past, so testing the continent’s hard-    no accident that Lorenzo Zambrano, chairman
                                                                                won macroeconomic stability. In addition, there         and chief executive of Cemex, the cement group,
                                                                                are other persistent long-term challenges that          launched a substantial Spanish acquisition in
                                                                                need to be addressed, especially education.             1992 on the 500th anniversary of Spain’s
                                                                                   “My biggest worry is people – and the shortage       colonisation of Mexico.

                                                                                of skills,” says Roger Agnelli, chief executive of
                                                                                Brazil’s Vale, the world’s largest iron-ore                              ULTILATINAS ALSO OFTEN
                                                                                producer. It is a complaint echoed again and                             place a high premium on first-rate
                                                                                again across the region. In Peru, for example,                           training for their executives – an
                                                                                there is a shortage of qualified welders needed                          MBA from a top US or European
                                                                                to build gas pipelines.                                                  business school, for example.
                                                                                   Then there is security and a rise in violence        SMEs, by contrast, are typically run and owned
                                                                                – often associated with drug criminality, most          by someone who gained on-the-job training at a
                                                                                particularly in Mexico.                                 larger company – and may then use that experi-
                                                                                   “Latin American governments have learnt to           ence to provide services to that same company.
                                                                                provide macroeconomic stability,” says one senior          Multilatinas, by dint of their scale or history of
                                                                                Mexican diplomat. “Now they need to be able to          state involvement, also rarely struggle for access
                                                                                provide social stability. Both are prerequisites for    to credit – either from large local private banks
                                                                                successful government.”                                 and state-owned lenders such as Brazil’s BNDES,
                                                                                   As daunting as it may seem today, achieving          or international bond markets. SMEs, by contrast,
                                                                                social stability is not an impossible task. In Colom-   are often self-financing, at least in the beginning,
                                                                                bia, for example, violence dropped sharply under        and are set up using personal or family savings.
                                                                                the administration of former president Álvaro              Although private equity and venture capital
                                                                                                                                        may slowly be changing this pattern by
                                                                                                                                        providing alternative sources of finance, poor

                                                       ‘latin american governments
                                                                                                                                        access to capital explains why most fast-growing
                                                                                                                                        Latin American SMEs are in services – rather

                                                       learnt to provide macroeconomic
                                                                                                                                        than more capital-intensive manufacturing,
                                                                                                                                        extractive or agro-industrial sectors. It is also

                                                       stability. now they need to be
                                                                                                                                        why Justin Lin, the World Bank’s chief econo-
                                                                                                                                        mist, says small local banks should be the back-

                                                       able to provide social stability’
                                                                                                                                        bone of emerging economies’ financial systems.
                                                                                                                                           Then there is geography. Less than a century
                                                                                                                                        ago, during the great rubber boom, the quickest
swooped on some of their multinational                                          Uribe, opening areas of the country previously          way to travel from Lima, Peru’s capital on the
competitors’ local operations when economic                                     closed through guerrilla activity.                      Pacific coast, to the provincial town of Iquitos
volatility prompted them to withdraw from the                                       How do small and medium-sized enterprises           620 miles away was on a boat that rounded Cape
region at the end of the 1990s.                                                 fit into this picture?                                  Horn and then paddled up the Amazon.
   Mexico’s América Móvil, for example, has been                                    As in most economies, SMEs account for the             Today, the internet and the growing ubiquity
a calculated acquirer of the distressed assets of                               bulk of companies and jobs. One study by the            of air travel is speeding integration both within
telecoms giants such as AT&T Latin America,                                     Inter-American Development Bank suggests that           and between countries in the region, and so
MCIWorldcom, Verizon Dominicana and the                                         in Latin America, SMEs account for 90 per cent          opening the way for today’s SMEs to become
Brazilian assets of BellSouth. It is now one of the                             of all firms, about two-thirds of employment and        tomorrow’s multilatinas. Plane freight volumes,
world’s largest telecoms companies and its owner,                               roughly a third of economic output.                     for example, have grown by 40 per cent in Latin
Carlos Slim, the richest man in the world.                                          Traditionally, though, SMEs have occupied           America this year, according to Iata, the trade
   Mr Slim’s wealth may be as much an advert for                                an uncomfortable position in the region, sand-          body – almost twice the global average.
his talent as it is for the region’s gross inequali-                            wiched between the large and often state-backed,           Nonetheless, the challenges remain large –
ties. But while Latin America still has many                                    commodity-producing big local companies,                and frustrating. Brazil, for example, is ranked
poor people, poverty is no longer what defines it.                              such as Brazil’s Petrobras or Venezuela’s               127th out of 183 countries this year in the World
Instead, it is the rising middle class. And here,                               PdVSA, and the continent’s huge and unmapped            Bank’s annual Doing Business Report, below
arguably, China’s hunger for the commodities                                    informal economy. In Peru, currently the region’s       Mozambique and Nepal.
Latin America has in abundance has done more                                    fastest-growing economy, set to expand by 8 per            But they can also be overcome. Just look at
than decades of western aid and countless                                       cent this year, the informal sector accounts for        Marfrig. A food company that began operations in
so-called “Marshall plans”.                                                     more than half of jobs.                                 1986 as a family-owned meat business outside São
   While the global financial crisis brought                                        SMEs, therefore, are perhaps best understood        Paulo, it now has a market capitalisation of $3bn
most of the developed world’s economies to                                      by what they are not. They exhibit more                 and annual sales last year of more than $6bn.
international business insight | finance

Stuck in the middle
Mexico’s medium-sized companies find financing hard to come by, but help is at hand, writes Adam Thomson

             n 2004, when Compartamos, the                  big boys’ club:                          In Brazil, Latin america’s largest economy,
             mexican microfinance lender, was still         Mexico’s stock                       many mid-sized companies have opted to expand
             a medium-sized organisation, it went to        exchange, where the                  by listing on the stock market. But in mexico,
             the local corporate debt market to raise       market is dominated                  the stock market has long been dominated by
             200m pesos.                                    by the country’s                     a handful of very large companies, and the few
                the company, which at the time              largest companies                    smaller ones that have listed have a notoriously
             had about 300,000 clients, thought it                                               illiquid stock.
             had got around its a- credit rating by                                                  mr saval says some of the blame for that dis-
securing a guarantee for 34 per cent of the                                                      parity – as of the end of last year, there were only
debt issue with the International Finance Cor-                                                   127 companies listed on mexico’s exchange, com-
poration, part of the world Bank. that raised                                                    pared with 377 in the case of Brazil – has to do
Compartamos’ rating for the deal to aa-, suffi-                                                  with the mind-set of families who own medium-
cient to bring institutional investors on board, the                                             sized companies. “owners in mexico have a real
company thought.                                                                                 problem letting go of their 51 per cent,” he says.
    Yet even with the IFC backing and following                                                      the upshot is not only that few companies ever
an elaborate road show, Compartamos failed to                                                    list, but also that few mergers and acquisitions
reach its target – though it came close. “It was                                                 take place among them – one of the traditional
hailed as a good deal at the time,” recalls patricio                                             ways that medium-sized companies grow.
Diez de Bonilla, Compartamos’ treasurer. “But for                                                    For all the difficulties, however, things appear
those of us involved, we were left with the feeling                                              to be changing. one of the great hopes for financ-
that we didn’t get what we wanted.”                                                              ing in the future – both for mexico’s corporate
    the experience of Compartamos in its                                                         debt market and for future initial public offerings
earlier days – it is now officially a bank, with 1.7m                                            – is the coming of age of the country’s private
clients – is typical of medium-sized companies in                                                pension funds, known as “afores”.
mexico, almost all of which struggle to acquire                                                      since their foundation in 1997, the afores
debt needed to finance the next phase of their                                                   have gone from zero to about $110bn under
growth.                                                                                          management today – roughly equivalent to
    But there are worse cases. one chief executive                                               11 per cent of mexico’s GDp.
of a mexican textile company, with annual sales                                                      Until recently, the afores could only invest in
of about 500m pesos ($40.2m) and a staff of 1,000,                                               government bonds and a very limited amount in
says his current efforts to raise financing have                                                 stock market indices. But that is now changing.
failed entirely.                                                                                 as oscar Franco, president of amafore, the
    the businessman, who asked to remain anony-                                                  association that represents the funds, told the
mous, says his company’s bank decided last year                                                  Financial times recently: “afores are destined to
not to renew a short-term credit line, forcing the                                               become a huge component of supplying credit to
company to offer price cuts of between 18 per                                                    the private sector.”
cent and 22 per cent to clients in return for their                                                  Indeed, Vanessa rubio of Consar, the
immediate payment.                                                                               government regulator that sets investment rules
    “It’s really tough being a medium-sized com-                                                 for the afores, says that whereas a few years ago
pany,” he says. “You are too big to take advan-                                                  almost all afore funds went into government
tage of the benefits of belonging to the informal                                                papers, only 60 per cent is now invested in the
sector, but too small for the banks and the                                                      public sector, with the rest invested in a wide
government to take any notice of your problems.”                                                 range of instruments, including corporate debt
    according to alvaro rodríguez, a founding                                                    and individual stocks.
partner at Ignia, a venture capital investment                                                       one of the more recent changes has been the
company, one of those problems is that mexico’s                                                  ability of afores to invest in so-called CKDs. a
banking sector only lends the equivalent of about                                                CKD is a hybrid of debt and capital that, when
20 per cent of the country’s gross domestic                                                      established, is registered on the stock market
product to the private sector – a small proportion                                               and acts as a fund to enable unlisted companies
of what banks lend in Chile or Brazil, for example.                                              to carry out specific projects. since their creation
“the fuel of any economy is credit, and here there                                               late last year, afores have invested about 23bn
is none,” he says.                                                                               pesos in CKDs, equivalent to 92 per cent of
    Guillermo ortiz, former governor of mexico’s                                                 the total.
central bank, believes the main problem with                                                         that investment, alongside a new flexibility
banks is not so much a lack of credit as it is a                                                 to invest in individual stocks as well as initial
slow and bureaucratic approach to processing                                                     public offerings, has created more attractive
and approving loans, which is caused by the                                                      conditions for funds such as nexxus to buy into
fact that 80 per cent of the banking sector is in                                                medium-sized mexican companies, overhaul their
foreign hands.                                                                                   management and accounting structures and pre-
    “many decisions of foreign banks have to pass                                                pare them for a listing.
through credit committees, which have to obtain                                                      Luis téllez, president of the mexican stock
authorisation from headquarters, so there end up                                                 market, is cautiously upbeat that the combination
being many layers,” he told the Financial times                                                  of growing afores, more flexible investing rules
this month.                                                                                      and companies such as nexxus is gradually
    In many countries, medium-sized companies                                                    creating a culture of medium-sized listings, with
– in mexico, these are ones with annual sales                                                    at least three so far this year after a long drought.
typically ranging from $30m to $300m – can turn                                                      “I would be lying if I said that there has been
to the corporate debt market for financing. But in                                               an inflection point,” he says. “But there have
                                                                                  photo: getty

mexico, the market is reserved almost exclusively                                                been three listings of mid-sized companies already
for top-tier companies, and there is almost no                                                   this year, and we are using those examples to
market for the smaller fry.                                                                      knock at the door of family businesses and say,
    Besides, says arturo saval, a founding partner                                               ‘Look, here is an interesting possibility.’”
at nexxus Capital, the country’s largest private
equity fund, many businesses would find it hard
to get the necessary credit ratings because they
are not sufficiently institutionalised.                     ‘Private pension funds are
    “many medium-sized businesses here are
run with a focus on tax optimisation, which is              destined to become a huge
totally legal, but it doesn’t let the financial
numbers reflect the strength of the business,” he           source of credit to the
says. “and that makes it hard for them to take
the next step.”                                             private sector’
InternatIonal busIness InsIght | challenges

neighbours living worlds apart
National differences will not stop Brazilian companies leading cross-continental trade. By Andrew Downie

                       arry Schmelzer knew             road to riches: the octavio                         eurofarma is one such company. The São
                       doing business in mexico        Frias de oliveira bridge in                     Paulo drugs group has splashed out more than
                       would not be easy. The          são Paulo. but not all parts                    $50m to snap up family-run companies in argen-
                       language, culture and tradi-    of the region have good                         tina and Uruguay during the past 18 months.
                       tion were all different from    infrastructure, forcing                         The moves give eurofarma a presence in those
                       his home in the south of        companies to produce                            countries, plus Paraguay and Bolivia, and will
                       Brazil. But it was meal times   goods locally                                   be followed by further acquisitions, says wesley
                       that floored the president of                                                   Pontes, its director of imports and exports.
the weG group, the electrical equipment multina-                                                           “we make generic drugs, and 65 per cent of our
tional – sometimes literally.                                                                          income is from that,” mr Pontes says. “So we are
    “when I got to mexico for the first time and                                                       solid and we have money in the bank. we realised
saw that you ate pork ribs and tacos and refried                                                       we had the chance to make good purchases. There
beans for breakfast, I was a bit scared,” mr                                                           are a lot of medium-sized family-run companies
Schmelzer says, only half joking. “lunch in Brazil                                                     that are having problems with the passing of gen-
is at midday and then you go back to work in the                                                       erations and are available to be bought, and our
afternoon. you have maybe a glass of wine, but                                                         strategy is to identify them and approach them.”
you watch your intake. In mexico, you go to lunch                                                          Further west, in chile and Peru, Brazilian
at three and the day’s over. It’s tequila and then                                                     companies are looking at acquisitions for different
you’re out of it.”                                                                                     reasons. roads and infrastructure leading towards
    Getting to grips with cultural variations can be                                                   the Pacific are notoriously bad, and getting goods
the difference between failure and success when                                                        to those markets is so expensive that Brazilian
doing business in latin america. But it is a chal-                                                     businesses struggle to compete with asian rivals.
lenge that more and more Brazilian companies                                                               “Transport and logistics costs are very high,
are accepting. after a wave of investment into                                                         even higher than import taxes,” says ms rios. “It
Brazil, the tide has turned and the country’s firms                                                    is sometimes cheaper to export from east asia to
are expanding across the continent.                                                                    chile than from Brazil, so companies that have
    “right now it is more about Brazilian compa-                                                       relevant markets in South america are forced to
nies investing abroad than the other way around,                                                       produce in those countries.”

and that wasn’t the case four years ago,” says
Sandra rios, director of the Integration and                                                                      ew amBITIOUS cOmPanIeS wOrry
Development Study centre, a rio de Janeiro-based                                                                  about security, corruption or instability
group that researches latin-Brazil business ties.                                                                 in their target nations. most are used to
“we had strong investments from mexico, argen-                                                                    violent crime at home and corruption
tina and chile, but now the situation is reversed.”                                                               is seen as an inevitable, if disagreeable,
    The percentage of direct investment from                                                           cost of doing business throughout the region.
Brazil has increased substantially in other latin                                                          Other than Venezuela, where the mercurial
american nations, according to cindes, a Brazilian                                                     president, hugo chávez, has nationalised a whole
research group. Since 1996, it has increased                                                           slew of companies, and to a lesser extent Bolivia,
12 times in chile, four times in Peru and seven                                                        latin american governments are pro-business.
times in colombia, and has reached the point in                                                            “Taxation is difficult, the language is a barrier,
ecuador where more than one-quarter of foreign                                                         the time it takes to establish a company and
direct investment originates in Brazilian reais.                                                       bureaucracy are slightly negative issues, but
    latin america’s “southern cone” – argentina,                                                       enough companies have managed to get round
chile, Paraguay and Uruguay – takes the bulk of                                                        those issues,” says Sir Peter heap, a former
Brazilian investment, with a third going to                                                            British ambassador to Brazil who now works as
argentina and a quarter to chile. half of it is                                                        a consultant for firms wishing to invest in the
destined for acquiring foreign partners, with the                                                      country. “Brazil is growing so quickly. It is not
main sectors still being minerals and oil and gas.                                                     a static situation; there is pretty swift growth.”
    Overall, 30 per cent of Brazil’s investment in                                                         The cross-continental trade has shifted, but it is
the region is in the extractive sector, far ahead of                                                   not all one way. Brazil’s booming domestic market
construction, chemicals, real estate, transport and                                                    means opportunities abound for audacious out-
storage, commerce and agriculture, all of which                                                        siders. The country’s middle class has grown expo-
tied for second place at 8 per cent each. But that                                                     nentially during the past decade and the economy
is showing signs of change, according to ms rios.                                                      is expected to grow by at least 7 per cent this year.
    “Brazilian companies traditionally invested                                                            Paz, a chilean housebuilder, was a leader in its
in latin america for reasons related to natural                                                        domestic market and opened a Peruvian arm with
resources,” she says. “Vale, Petrobras and Gerdau                                                      local partners in 2008, says Francisco Ulloa, its
are good examples and they continue to invest.                                                         international director of joint investments. This
But the new phenomenon is mid-sized industrial                                                         year it made moves into Brazil. Such moves are
companies that are investing abroad, too. There is                                                     not easy, mr Ulloa says, because Brazil is much
definitely a trend towards diversification both in                                                     larger and so much more dynamic than its neigh-
terms of the sector and the size of the companies                                                      bours. Doing business in Portuguese requires
doing business.”                                                                                       not just new language skills, but also significant
    ms rios says the main reason for the change                                                        amounts of cash, preparation and patience.
is that many companies with the vision and the                                                             “Other latin american companies have been a
resources to invest abroad have already done so.                                                       bit cautious about investing in Brazil because of
now, smaller companies are seeing the benefits.                                                        its size,” he says. “you need two or three or four
    They have easier access to credit – and a                                                          times the capital than that which you need to
helping hand from Brazil’s national development                                                        invest in other latin american countries.”
bank; better cash flow thanks to the country’s                                                             Paz spent years investigating the Brazilian mar-
booming domestic market; and a need to expand                                                          ket before it invested, mr Ulloa says, and he hopes
lest they become a target for takeovers.                                                               that patience will pay off. But whatever happens,
                                                                                                       the move – and others like it – marks a sea change
                                                                                                       in latin american investment practices, he says.

‘In Mexico, you go to lunch                                                                            The difference now is that latin american compa-
                                                                                                       nies are realising there is money to be made closer

at three and the day’s over.                                                                           to home and they are making moves on their own,
                                                                                      photo: reuters

                                                                                                       without appealing to foreigners.

It’s tequila and then you’re                                                                               “For the first time ever we are not looking for
                                                                                                       capital outside,” mr Ulloa says. “Investments are

out of it’                                                                                             being carried out with latin american capital
                                                                                                       inside latin america.”
international business insight | regional trade

a dream disrupted
Disparate ideologies have so far scuppered plans for a unified Latin America, writes Vincent Bevins

                   here is a dream that                   “trade has multiplied by at least five times
                   moves the neighbours of our         among its members since the creation of Mercosul
                   region, and that is the dream       [as it is called in Portuguese],” says Prof Cretoiu.
                   of Latin american integration,”     “the trend is that it will continue to promote
                   says sherban Leonardo Cretoiu,      trade among the members.”
                   a professor at the Fundação dom        in Brazil, larger companies ship raw materials
                   Cabral, a prestigious business      out of Latin america and provide the bulk of
                   school in Brazil.                   export income, while smaller or medium-sized
    this dream would have been familiar to the         enterprises make industrial products that may not
region’s leaders almost two centuries ago, when,       be competitive abroad, but are regionally because
inspired by broadly shared liberal republican          of customs and trade agreements.
values, its countries began to shake off european         “mercosur provides benefits by promoting
rule. But now, the region’s few micro-regional         the exchange of intermediary components,” says
trading agreements and a larger political              Prof Cretoiu. “You can have an extended value
economic project remain fractured because of           chain within the countries and use the production
widely varying ideological standpoints.                capacities of both, mainly Brazil and argentina.”
    the agreements that exist, such as mercosur           this is especially useful in the automotive
in the “southern cone” of the continent and the        industry, but the trading bloc also benefits sectors
Community of andean Nations (CaN) in the               such as energy, plastic, rubber, steel and chemi-
andes, have stalled or regressed because of            cals, says mr Claveria. “the argentine chemical
conflicts such as those between the radical            sector, for example, isn’t so competitive world-
socialist project of President hugo Chávez of          wide. But it is, to an extent, regionally. mercosur
Venezuela and Colombia’s Us-backed, investor-          allows for that window of opportunity.”

friendly capitalism. many countries are now
pursuing bilateral rather than regional                           or aLL merCosUr’s sUCCesses,
agreements.                                                       the question of its expansion has run
    Nevertheless, agreements such as mercosur                     into political issues all too familiar in
have provided a framework for increased intra-                    Latin america. Venezuela’s incorpo-
regional trade, especially for manufactured goods,                ration has already been approved by
as global macroeconomic forces have powered the        Brazil, argentina and Uruguay – after a required
rise of domestic demand in Latin america.              confirmation of the country’s democratic creden-
    “the boom in the export of commodities to          tials – but still needs to get through the Para-
countries such as China and india has led to the       guayan legislature. if and when it joins, Vene-
emergence of Latin american countries with a           zuela’s import-hungry market should provide
large consumer demand,” says mauricio Claveria         ample opportunities for southern nations.
at abeceb, a consultancy in argentina.                    Venezuela is a former member of CaN, which
    “agreements such as mercosur facilitate trade      has seen its potential deteriorate because of politi-
within the region of products with higher levels of    cal differences. mr Chávez decided to leave in 2006
added value,” he adds.                                 because Peru and Colombia made movements
    mercosur, which unites Brazil, argentina,          towards free-trade agreements with the Us, and he
Uruguay and Paraguay, has been effective in
                                                                                                               ‘We changed our strategy
                                                       declared the community “dead”. relations between
promoting increased trade between the continent’s      Venezuela and Colombia worsened in the following
biggest economy and its traditional rival.
                                                                                                               to look for more bilateral
                                                       years, deteriorating even to military threats.
    according to Celso amorim, Brazil’s foreign           though its formal structure survives and still
minister, argentina will soon overtake the Us as
                                                                                                               agreements instead of relying
                                                       provides benefits in the forms of a customs union,
the country’s second-largest trading partner. the      CaN suffers from gaping political differences that
first is China, whose appetite for soya and iron ore
                                                                                                               on multilateral institutions’
                                                       make external bilateral trade agreements more
has driven Brazil’s economic growth.                   attractive for its four remaining members.

 brazilian expansion of Peruvian soda maker augurs well

               ggressiVe exPaNsioN has                     the company, one of Peru’s biggest family-          says it has no plans to raise outside capital. its
               been a hallmark of ajegroup’s busi-     owned enterprises with 12,000 employees, has a          Peruvian roots have given it expertise in dealing
               ness since the soda maker concocted     history of taking on seemingly outsized                 with complicated distribution systems. Between
               its first batch of Kola real 20 years   challenges. the añaños brothers founded the             20 per cent and 80 per cent of stock has to reach
               ago in the Peruvian highland town of    company at the height of Peru’s shining Path            these small vendors, depending on the market.
 ayacucho. today the company sells 3.5bn litres        terrorist insurgency amid kidnappings, massacres            Brazil’s notorious city traffic presents a
 of beverages a year across 16 countries, and          and regular sabotage of roads and infrastructure.       selling opportunity that is common across the
 is entering four new markets in the next six          “We started 20 years ago in the mountains of Peru       emerging world, he adds. “You can see traffic
 months – indonesia, india, Vietnam and Brazil.        with just $20,000, and now we have sales of $1.5bn      jams right now in mexico City, in Bangkok, in
     News of the move into Brazil created an extra     and persistent growth over the past five years of       Jakarta – with more and more cars and not
 fizz of excitement in Peru, which is experiencing     30 per cent,” mr Lopez doriga says.                     necessarily more roads. People are in their cars,
 strong inward flows of investment from its vast           its $3m Brazilian plant in Queimados, rio de        it’s hot and they’re thirsty. street vendors
 neighbour to the south.                               Janeiro, will be able to produce 72,000 units an        become more important.”
     “the international market is the most             hour to quench Brazilian thirsts.                           san miguel, a Peruvian beverage company
 important for us,” says Jorge Lopez doriga, a             While ajegroup produces 17 trademarks across        controlled by one of the añaños brothers, is also
 corporate director at ajegroup. “our strategy         a portfolio of juices, nectars, light beverages,        building a plant in the northern Brazilian region
 is not to go to more mature markets, but to the       bottled natural water and beer, it has chosen Big       of Bahia that will open by next march.
 emerging markets. We started in an emerging           Cola to spearhead the Brazilian expansion.                  in the finance sector, grupo aCP, the parent
 nation and we go to emerging countries ... the            “our Big Cola slogan is ‘think Big’, and in         company of miBanco, Peru’s biggest microlender,
 distribution channels and philosophies often are      all of these emerging economies we are inviting         announced this year it would partner Ceape
 similar, and [there is an] entrepreneurial spirit.”   our consumers to do what we do and think big            maranhao to create Brazil’s first specialised
     While Brazilian companies such as odebrecht,      – because now it’s possible for a Brazilian or an       microfinance bank. the $38m joint venture, which
 Vale and Votorantim have invested heavily in          indian or an indonesian to say, ‘i don’t have to        has branches in 99 municipalities in Brazil’s
 Peruvian infrastructure and mining projects,          stick to my territory, i can be a multinational,’”      maranhão state, has since enrolled 20,000 clients
 ajegroup is one of only a handful of sizeable         says mr Lopez doriga.                                   with loans worth more than $200m.
 Peruvian companies to cross the 1,860-mile                the company took advantage of the downturn              miguel Vega, president of the Brazil-Peru Cham-
 border into the world’s eighth-biggest economy.       to reinvest profits in developing new markets, and      ber of Commerce and integration, says Brazilian
                                                                                                         international business insight | regional trade

                                                                                                         Big opportunity
                                                                                                         Adam Thomson on talks about a Brazil-Mexico trade accord

                           ecuador and Bolivia’s socialist governments,                                                             exico and Brazil
                       for example, have a hard time finding agreement
                       with the more right-leaning governments in Peru
                                                                                                                                    this month announced
                                                                                                                                    the start of negotiations
                                                                                                                                                                  ‘if Mexico signs an
                       and colombia.
                           “recently, it was very difficult for us to
                                                                                                                                    that could eventually
                                                                                                                                    lead to what government
                                                                                                                                                                  agreement, it would
                       negotiate with the eU alongside ecuador,” says
                       Francisco Prada of the colombian chamber of
                                                                                                                                    officials in both countries
                                                                                                                                    call a “strategic
                                                                                                                                                                  have preferential
                       commerce. “We have totally different visions. We
                       are more free-market capitalists and they have
                                                                                                         accord” between latin america’s two largest
                                                                                                                                                                  access to the
                       a very strong social vision. after the difficulties
                       between [former colombian] president Álvaro
                                                                                                            if all goes to plan, the resulting agreement
                                                                                                                                                                  brazilian market’
                       Uribe and chávez, we changed our strategy to                                      would not only reduce tariffs between the two
                       look for more bilateral agreements instead of                                     countries, but would also entail treaties in key         upbeat about the possibilities. He points out, for
                       relying on multilateral institutions.”                                            areas of the economy, agreements on investments,         example, that Mexico would benefit considerably
                           chile, one of the richest and most developed                                  property rights and public sector investment.            from a lowering of Brazilian tariffs, which are
                       countries in latin america, also prefers to rely                                     as Beatríz leycegui Gardoqui, Mexico’s                currently about 12.5 per cent compared with about
                       on bilateral agreements, and is the only South                                    assistant secretary for foreign trade at the             5 per cent in Mexico. “if Mexico signs an agree-
                       american country – excluding the tiny and                                         economy ministry, told the FT this month: “The           ment, it would have preferential access to the
                       often-overlooked countries Guiana, French                                         idea is to negotiate a truly broad agreement in          Brazilian market before other countries,” he says.
                       Guiana and Suriname – that is not a member of                                     which Brazil and Mexico can co-operate with each            at the same time, he admits that Brazil could
                       any regional trade grouping.                                                      other.” Ultimately, she said, the accord’s structure     learn much from Mexico, which already has trade
                           The remaining countries in latin america look                                 could even allow other countries to join later on.       agreements with 44 countries. “Mexico has long
                       north rather than south. Mexico is tied to the US                                    on paper, at least, such an agreement is              experience in this area compared with Brazil, and
                       and canada through the north american Free                                        potentially a big deal. Mexico and Brazil are by         we do not have an agreement with a country the
                       Trade agreement; the poor and small countries of                                  far the largest economies in latin america and           size of Mexico,” he says. “it is a stimulus for us.”
                       central america are linked to the US through the                                  together make up an estimated 74 per cent of the            He also points out there could be important
                       central american Free Trade agreement.                                            region’s gross domestic product. They are also by        co-operation agreements in areas of nanotech-
                           Few think Mercosur will be expanded beyond                                    far the most populous countries in latin america,        nology and biotechnology and, in particular,
                       Venezuela any time soon, or that can will serve                                   with a combined population of about 300m –               energy. it is no secret that Pemex, the Mexican
                       as a basis for larger integration.                                                almost the size of the US.                               state-owned oil monopoly, would like to have
                           The last attempt at a huge regional trade                                        Yet trade between the two countries last year         greater access to the know-how and technology
                       grouping, the US-backed Free Trade area of the                                    was a mere $6bn. To put that figure into perspec-        of Petrobras, the Brazilian oil company, when it
                       americas, was killed off by countries that saw it                                 tive, Mexican exports to Brazil accounted for just       comes to deepwater exploration.
                       as tipped in Washington’s favour.                                                 1 per cent of the total, while Brazilian exports to         Meanwhile, the ambassador says, Petrobras
                           remaining hopes for the dream of latin                                        Mexico represented 1.8 per cent of that country’s        could benefit from certain areas of Pemex’s
                       american integration are pinned on Unasur, the                                    total exports.                                           expertise, such as gas injection to augment pro-
                       union of South american nations, a new                                               For Mexico, the promise of a wide-ranging             duction from existing wells.

                       grouping that includes all countries on the                                       agreement with Brazil comes at a delicate time.
                       continent. The project has big ambitions but is in                                The country of about 108m people is struggling to                         arÍa criSTina caPelo,
                       its very early stages and serves mostly as a forum                                recover from the worst recession since 1932, as the                       an investigator at Mexico city’s
Different hymn         for discussion. “it’s not just a dream,” says Prof                                economy contracted by 6.5 per cent in 2009 – the                          centre of research for develop-
sheets: leaders of     cretoiu. “But political differences make it difficult                             worst performance in the region.                                          ment, argues that multinational
the ‘southern cone’    to actually accomplish much.”                                                        Much of that contraction had to do with the                            companies operating in both
nations meet in            That may not matter so much at the moment.                                    intimate link that Mexico’s economy has with that        countries could be important beneficiaries of an
Montevideo, uruguay,   Trade within the region is likely to continue                                     of the US and the open nature of its economy.            eventual accord because they could integrate
to discuss the         to grow, aided by existing structures, new                                        about 80 per cent of its exports go to its northern      operations more closely.
Mercosur trade deal    bilateral agreements and the rise of the latin                                    neighbour, and exports account for about 30 per              “Brazil and Mexico have many similar
                       american consumer.                                                                cent of GdP. The result is that every time there is      products, but if you look at sectors such as
                                                                                                         a downturn in the US, Mexico suffers.                    automobile parts and aerospace, there is potential
                                                                                                            “depending economically on only one region is         because a lot of the commerce is between
                                                                                                         inadequate for any country ... such dependency           companies,” she says. She also sees an upside in
                                                                                                         explains why Mexico was so affected in this              petrochemicals, where Brazilian companies
                                                                                                         crisis,” Felipe calderón, Mexico’s centre-right          setting up in Mexico could purchase primary
                                                                                                         president, said this year after a meeting with luiz      materials from Pemex to manufacture derivatives.
                       companies are expected to invest about $33bn in                                   inácio lula da Silva, his Brazilian counterpart.             inevitably, though, many challenges to
                       Peru’s gas, petrochemical and energy sectors in                                      For Brazil, an accord with Mexico also                reaching agreement lie ahead. one is the
                       the next decade. among these are Vale’s $566m                                     represents a big opportunity. While the country          potential resistance from Mexican companies
                       investment in the Bayobar phosphate mine,                                         has by far the largest domestic market in latin          involved in agriculture, where Brazil is bigger and
                       Votorantim’s $420m purchase of a controlling                                      america, and has also been the darling of                more competitive.
                       stake in Milpo, Peru’s biggest zinc mining com-                                   international investors in the region in recent              experts say any far-reaching agreement would
                       pany, and eletrobras’s contract for construction                                  years, it has a much more closed economy than            have to include persuading Brazil to drop non-
                       of the $4bn-$5bn inambari dam. odebrecht will                                     that of Mexico, and exports account for just             tariff barriers such as certain sanitary require-
                       this month inaugurate the $3bn inter-oceanic                                      14.3 per cent of its GdP.                                ments for Mexican products – an area in which
                       Highway, which will link Brazil for the first                                        experts say a deal with Mexico could lift that        Mexico’s ability to negotiate will almost certainly
                       time with Peru’s Pacific ports and, by extension,                                 figure and provide important access for Brazilian        be tested to the limit.
                       china and other asian markets.                                                    products to the US and canadian markets through              another key area is energy, where legal and
                          “We estimate that after 2011 we will see a                                     the north american Free Trade agreement, which           constitutional restrictions in Mexico prohibit
                       42 per cent increase in bilateral trade between                                   binds the US, canada and Mexico.                         Pemex from entering into joint venture contracts
                       Brazil and Peru,” Mr Vega says. He predicts the                                      Sérgio augusto de abreu e lima Florêncio              with third parties.
                       flow of investment will speed up next year as                                     Sobrinho, Brazil’s ambassador to Mexico, is                  Unless the agreement can overcome at least
                       infrastructure improves and companies seek to                                                                                              some of those hurdles, it is highly unlikely that
                       take advantage of Peru’s trade agreements with                                                                                             Petrobras would be willing to share much of
                       china, the US, Japan, South Korea and others.
                          Mr lopez doriga sees only opportunity in
                                                                                                         ‘Depending on one                                        its know-how in deepwater drilling – an area
                                                                                                                                                                  that Mexico considers vital for its long-term oil
                                                                                                         region ... explains
                                                                               photoS: reuterS; corBiS

                       Peru and Brazil’s deepening relationship. “The                                                                                             self-sufficiency.
                       world is changing; it’s a new world order,” he                                                                                                 Without meeting those challenges, there is a
                       says. “if you look at the projections of the top
                       10 countries in the world, you will see all the
                                                                                                         why Mexico was so                                        danger that any resulting accord would end up
                                                                                                                                                                  looking more like a widening of the current trade
                       emerging companies are there – and how the old
                       world is dropping out of that list very quickly.”
                                                                                                         affected in this                                         agreement between the two countries, which
                                                                                                                                                                  covers roughly 800 products. That would be a step
                       Naomi Mapstone
                                                                                                         [financial] crisis’                                      in the right direction, but it would also almost
                                                                                                                                                                  certainly be an opportunity wasted.
international business insight | case studies

How to thrive — or just survive —
Three companies that have found success, but not always to the government’s liking

In China, dragons are a symbol of power and
strength, and Argentina’s Pan American Energy
can testify to that.
   When the company was formed in 1997 by
an alliance between Amoco of the US and Bridas,
a private Argentine company, its flagship
Dragon Hill (Cerro Dragón) oil field, the biggest
in Argentina, was a lethargic old beast with
sinking production.
   Transformed into a modern operation after a
technological overhaul designed to unlock
untapped hydrocarbons, production and reserves
at Dragon Hill have doubled in the past decade
and Pan American is now Argentina’s second-
biggest oil producer, accounting for roughly
18 per cent of the country’s output.
   As it pumps out oil, it has taken care also to
pump billions of dollars back into its business in a
strategy that has flown in the face of that applied
by most of its peers, who have neglected reserves
and stalled investment because of heavy govern-
ment regulation and political uncertainty.
   Pan American has investment of $1.05bn
earmarked for its Argentine operations this year,
after $874m in 2009, and the company says it has
poured in $6.7bn in total since 2001.
   As a result, production has soared by 90 per
cent to an average 241,000 barrels of oil equivalent
per day (150,000 of those at Dragon Hill) compared
with 121,000bpd a decade ago. That and new
proven reserves give a reserve replacement rate of
194 per cent in the past 10 years, the highest in the
industry in Argentina. It now has 1.42bn barrels
of oil equivalent in reserves, up from 858m in 2000.
In that time, oil output has soared by 48 per cent,
while gas production has nearly doubled.
   It is no surprise that Dragon Hill’s future looks
“unstoppable”, according to BP, which owns a
60 per cent stake in Pan American. However, the
British company is currently negotiating its exit
– due to be completed within weeks, according to
sources close to the deal.
   That opens the door for China’s Offshore
National Oil Corporation to consolidate its posi-
tion. The Chinese group’s purchase of 50 per cent
of Bridas this year in a $3.1bn swoop gave it an
indirect stake in Pan American.                         Pot of black gold: Pan                                                                                                      really good business, and I knew very early on
   The Argentine company says it had assets in
2009 of $7.2bn, but the market is already pencil-
                                                        american energy’s
                                                        Dragon hill oil field in
                                                                                                                             Mexico                                                 that we had to expand,” he says. The problem
                                                                                                                                                                                    was that there was no credit. “The banks just did
ling in valuations of as much as $20bn, largely         southern argentina                                                   It is an early weekday morning in Mexico City          not want to know,” he recalls. “They were very
because of the value of the reserve portfolio it has                                                                         and the main room in the Santa Fe district branch      scared, they didn’t even look at the numbers and
steadily built up.                                                                                                           of Sports World is filled with office workers going    they shut the door in our face.”
   In its core business, Pan American has                                                                                    through their paces on rows of spinning machines           So he financed the first expansion phase with
spotted opportunities and grasped them, such as                                                                              and treadmills. Inside the airy atmosphere and         the help of family and friends. By 1996, and
renegotiating the operating concession for Dragon                                                                            floor-to-ceiling windows, the scene is much like       several branches later, the business had
Hill early, enabling a contract extension until                                                                              that in the many other gyms that have opened in        officially become Sports World.
2027, with an option to push that forward again                                                                              Mexico during the past few years.                          Yet Mr Troncoso was nearing the end of his
until 2047.                                                                                                                      But Sports World is a rare case of a home-         expansion model. “The bottom line was that there
   For a company so committed to boosting                                                                                    grown, medium-sized business in Mexico that            just weren’t any more friends and family to ask
reserves – it drills an average of 200 new wells                                                                             appears to be succeeding in its quest to become        to join,” he says. The business had also grown in
a year and invests heavily in technology and                                                                                 big. Last month, the company listed on the Mexico      a haphazard manner, with each branch operating
infrastructure – government programmes offering                                                                              stock exchange, selling 61 per cent of its shares to   as an independent company with its own share-
a higher-than-prevailing-market price for new pro-                                                                           the public and raising 850m pesos ($68.7m) in the      holders, rather than as the unified entity it
duction are a boon. It is also involved in higher-                                                                           process. Significantly, and thanks to pension-fund     proclaimed to be. As Mr Troncoso puts it: “On the
risk offshore exploration, where it has earmarked                                                                            rule changes for investments introduced towards        inside it was a bit chaotic.”
                                                                                   pHotos: pan american energy; dreamstime

$80m in investment to 2012.                                                                                                  the end of last year, two private pension funds,           So he called Nexxus Capital, Mexico’s largest
   Pan American generates solid foreign currency                                                                             known as afores, took some of the initial public       private equity group. Nexxus shook the com-
earnings that mitigate its exposure to currency                                                                              offering, as well as other institutional investors.    pany up, centralising the management structure
mismatches, and has manageable debt – about                                                                                      As Luis Téllez, president of the stock market,     making the finances and share structure more
$1.5bn at a consolidated level.                                                                                              told the FT recently, the IPO “completes the           coherent. In short, it made Sports World more
   It earned roughly $1.9bn from exports last year                                                                           financing cycle ... and the interesting thing was      “institutional”.
and had total sales of $2.78bn on production of                                                                              that it is a mid-sized company”.                           Between 2005 and this year, when the company
90.6m barrels of oil equivalent. The company has                                                                                 But it was not always that way. Sports World,      listed, it had already almost tripled its number
also successfully issued paper, including $500m                                                                              which has 14 branches and 25,000 clients, began        of branches, and went from $32m to a market
this year, and tapped multilateral loans.                                                                                    life in 1989 as the Tarango Club in the south of       capitalisation of $140m when it floated last month.
   BP said this year that Pan American “thrived                                                                              the capital. It was a family business and there        Some analysts say it has the potential to double
in the face of adversity”. But then in China,                                                                                was only one branch. But Héctor Troncoso, one          its number of branches in the next four years and
dragons are revered for bringing good fortune.                                                                               of the owners, remembers that the club his father      see a similar rise in its market capitalisation.
Jude Webber                                                                                                                  established was extremely profitable. “It was a        Adam Thomson
                                                                    international business insight | comment

 in a tough environment                                                                                        Output per worker
                                                                                                               As % of US output per worker

                                                                                                                           Latin America

Venezuela                                               Marcelo giugale creativity is key if Latin America is to progress
As paradoxical as it may seem, many businesses
in Venezuela have flourished in spite of
President Hugo chávez’s best attempts to install
his “21st-century socialism”. not least among
them is Polar, Venezuela’s biggest privately                                                                   0.2
owned company.                                                                                                    1980      85       90    95   2000   05      10 14

    A national icon that has been around for six
decades, the food and drink group has benefited                   uccessFuL LAtIn AmeRIcAn                     Number of patents
from a consumer boom powered by high oil prices                   countries will have to learn to live with
                                                                                                               Per 1,000 researchers in R&D
in recent years. Indeed, in spite of the economic                 appreciated currencies.
downturn, the fortune of the mendoza family,                         With interest rates in the developed
which owns Polar, surged last year from $2bn to                   world likely to stay low for a while,
$3.5bn, according to Forbes magazine.                   money will continue to flow into the region’s          Japan
    But after almost 12 years in power, Venezuela’s     more promising economies. this will make them          Netherlands
anti-capitalist leader is continuing to radicalise      less competitive. there is little they can do about    Germany
his “Bolivarian revolution”, one of whose defining      it – accumulate reserves, impose capital controls      Canada
characteristics is the nationalisation of “strategic”   and taxes, keep banks from credit sprees, increase
sectors of the economy, which include oil, cement,      productive efficiency. But these are either            Hong Kong
banking, farming, electricity and telecoms. the         unsustainable measures or long-term reforms.           Finland
production and distribution of food has also been           the reality is that living in – or exporting       Sweden
earmarked as a strategic sector, which has caused       from – places such as Bogotá, Lima, são Paulo and      UK
friction between Polar and the government.              santiago will be more expensive in us dollars. It
    Polar began in 1941 as a brewery on the out-        will be harder to sell products in the us and in
skirts of caracas. It now employs 30,000 workers        any other country that keeps its currency tied to      Venezuela
and operates 14 plants and 75 distribution centres      the us dollar, notably china. that is why success      Chile
across Venezuela, producing everything from             in trade will depend more on new products. While       Mexico
margarine and cooking oil to mayonnaise and             getting additional free-trade agreements will still    Brazil
ice cream. It also distributes Pepsico products in      be good, creating new brands will be even better.
Venezuela, and is one of the few local producers            the problem for Latin America is that, on the
of wine, after setting up a joint venture with          whole, it has not excelled at innovation – either at   Argentina
martell, the French cognac manufacturer.                doing new things or at doing the same things in a      China
    But last year the government occupied a Polar       new and better way. It has been slow to acquire,
rice plant for 90 days, and in February mr chávez       adopt and adapt technologies that exist elsewhere.                   0      20 40 60 80 100 120 140 160
ordered the expropriation of a Polar distribution       It invests too little in research and development,     Source: World Bank
depot in Barquisimeto, Venezuela’s fourth-largest       provides few tax incentives and does not protect
                                                        intellectual property well, and its universities are
                                                        disconnected from its businesses.                      are not based solely on markets; all relevant

‘Polar complained of government
                                                            this is reflected in the minute levels of patent   stakeholders are engaged (big and small, public
                                                        registration, declining total factor productivity      and private); somebody is accountable for results;

harassment, stating that from
                                                        compared with the us, few companies acquiring          they are part of a broader effort of integration;
                                                        quality certifications and a commercial penetra-       they are well funded; they are continuously

2008 to 2010 its factories were
                                                        tion that has been stagnant for decades – only         evaluated and adjusted; they begin with quick
                                                        about 5 per cent of world trade has a Latin            wins (usually in the area of quality standards);
                                                        American as partner.
inspected 600 times’
                                                                                                               they include reforms in tertiary education; and
                                                            even before the credit crisis of 2008, the years   they operate within a reliable legal framework.
                                                        of abundant financing saw only a handful of new           Interestingly, more private innovation in Latin
city. Polar has also complained of harassment           Latin American business lines come to market –         America will call for better public action. From
by the government, stating that between Janu-           premium foods, medical tourism, aeronautical engi-     venture funding to skills improvement, the state
ary 2008 and April this year its installations were     neering, software development and call centres.        will have a new role to play. Rather than taking
inspected more than 600 times.                              It could be called the curse of commodities.       the exclusive leadership, as it tried in the past
   Venezuela’s combative president has repeat-          Why risk new ventures in a region where good           – with poor results – it will become a catalysing
edly threatened to expropriate Polar outright.          old natural wealth is abundant and pricey?             partner in multi-agent efforts. In some cases, it
“We will see who can last longer, mendoza, you          Ironically, some of the best recent innovations in     will contribute resources; in others, reforms.
with your millions or me with my morals,” mr            Latin America happened in commodity indus-
chávez told Lorenzo mendoza, Polar’s president,         tries – the technological revolution in Argentina’s    The writer is the World Bank’s director of
in a televised speech in June. For his part, mr         soyabean production; efforts at environmental          poverty reduction and
mendoza has preferred to keep a low profile and         sustainability in Peru’s mining.                       economic management for
has avoided provoking the irascible leader.                 can Latin American creativity be unleashed,        the Latin America and
   many believe mr chávez has held back from            regardless of sector? It will take years to fix the    Caribbean region
taking over the company because of concerns that        problems that smother innovation in the region,
the government would fail to run it as efficiently.     but the new global reality will make change
Polar is cited by Venezuelans as a paragon of           unavoidable. Will there be a single formula?
corporate culture and a model for how a company         no. Latin American countries differ in terms of
should be managed. the government, in contrast,         technological stock, efficacy of tax systems,
has a patchy record and is often accused of             quality of human capital, legal predictability
incompetence and corruption. Venezuelans                and institutional capacity.
already suffer sporadic shortages of basic food-            But successful innovation strategies show
stuffs; if the company faltered under state             some common features that point the way.
control, it could dent mr chávez’s popularity.              they are priorities of the state (they do not
   Polar controls about three-quarters of the           change from government to government); they
national beer market, and its Harina PAn maize

                                                        More private
flour can be found across the country.
   nevertheless, the company’s efforts to expand

                                                        innovation in latin
abroad have been less successful. some of Polar’s
products are available in the us and Puerto

                                                        america will call for
Rico, but colombia is the only significant export
market in Latin America where Polar beer has

                                                        better public action
managed to gain a proper foothold.
Benedict Mander

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