Latin Trade (English Edition) Mar/Apr 2013 by Latin Trade Group

LATIN TRADE

LATIN COMPANIES AFTER THE UNCONVENTIONAL FUEL REVOLUTION

SUSTAINABLE

GROWTH Urbanization Water Management Innovation Entrepreneurship

Trends that will shape a sustainable environmental and social future in Latin America SUSTAINABLE GROWTH MARCH / APRIL 2013

YOUR BUSINESS SOURCE FOR LATIN AMERICA » WWW.LATINTRADE.COM

MARCH/APRIL 2013

CONTENTS

MARCH/APRIL 2013

VO L . 2 1 N o . 2

Features 18 Sector Report: LatAm Leads the M&A Revival

20 Industry Report: Coffee Colombiaâ&#x20AC;&#x2122;s bitter harvest

22-30 World Economic Forum 23 24 26 28 30

Latin America: Small Cities, Big Challenges Entrepreneurship: The Creators Of Growth Innovation: Innovation Or Bust Water: A Thirsty Continent? The Message From Davos, column by Embraer CEO, Frederico Fleury Curado.

32 Industry Report: Commodities Touch and go for gains in grains

34 Industry Report: Energy Players Or Mere Spectators?

40 Tourism: The Seducers 42 Investors: Donald Trump 44 Special Report: Franchising Think Global, Act local

48 The keys to a successful franchise, by Arcos Dorados CEO, Woods Staton.

50 Special Report: Women on Board

52 Country Report: Chile Edging Towards Developed Status

60 Special Report: Social Responsibility CSR, have we learned anything?

52 4

LATIN TRADE

MARCH-APRIL 2013

CONTENTS

MARCH/APRIL 2013

VO L . 2 1 N o . 2

Editorâ&#x20AC;&#x2122;s Note 8

What Business Leaders Want

The Scene 12 LatAm Exports slowed in 2012

Opinion 16 The Contrarian: Corruption is growing (again) in Latin America By John Price

Events 76 CFO Miami

Tech Trends 78 Cloning the Etsy Model

Travel 80 Road Warriors Gird up with Gadgets

Trade: Mercosur 82 A trade pact left out in the cold

Spotlight: Ambev Ecuador 84 The BUD clock

Web Find us online at www.latintrade.com

Cover: Sustainable Growth

LATIN TRADE

MARCH-APRIL 2013

80 84

©ISTOCKPHOTO.COM/ LEONTURA

EDITOR’S LETTER

WHAT

BUSINESS LEADERS WANT L

atin America is a region that is under construction. Economic growth is finally promoting the availability of better public services. It is helping to develop relations between governments and their citizens. Serious efforts are being made to develop infrastructure, and — in some cases —governments are becoming more transparent and efficient. In brief, the region is becoming more competitive, as well as a productive and safe place in which to live. How can these changes be speeded up and also become more sustainable over time? Without doubt, sustainable development has its origins in the sound administration of cities. Latin America is the most urbanized region in the world, with 80 percent of the population living in towns and cities. In addition, the concentration of productive activity in the cities will continue in the coming years. McKinsey reckons that 65 percent of Latin American growth through 2025 will come from the 198 biggest cities. On the other hand, sustainable development will also emerge from the creation of companies that are competitive by means of innovation in business processes, products and models. Higher education is a necessary element of this trend, as is applied research into the resources of the region. Countries ought to re-invest the profits of the commodities bonanza in activities that promote innovation. “Investments have to be made in sectors for when a boom is coming to an end,” says Columbia professor José Antonio Ocampo. That is true in manu-

LATIN TRADE MARCH-APRIL 2013

facturing, services, even in primary goods, but always in activities where technology is paramount. “If Latin America doesn’t do that, it will continue to grow at the mediocre levels of today,” he says. In the same way, it is important to promote the rise of a “high-impact” legion of business people who can promote the accelerated growth of their companies. These can provide a jolt to increases in production, and formal — as well as productive — employment. Unemployment levels in Latin America stand at 6.3 percent, but 44 percent of those employed have jobs with low productivity. With all these elements in place, a good measure of the financial and social sustainability of companies would be in place. Increasingly, however, more environmental variables have to be included in the growth equation. Part of the increase in demand for natural resources can be met by improvements in efficiency and use of the explosion in Internet and communications services. As far as the rest is concerned, there is no option but to take care of what

already exists. At the current rate of use of natural resources, the National Intelligence Council calculates that now we are going to need one and a half times the Earth simply to sustain ourselves. These issues have to form part of the business plans and strategies of the region’s entrepreneurs. Solutions have to be found and measures taken so that public resources can be efficiently managed to promote these causes. That is, in part, the predominant theme of our cover story — one that we want to open a debate that will always be open.

Santiago Gutiérrez, Executive Editor sgutierrez@latintrade.com

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CORRESPONDENTS Argentina: Élida Bustos, David Haskel, Charles Newbery • Brazil: Taylor Barnes (Rio de Janeiro), Tereza Cruvinel (Brasilia), Vincent Bevins, Thierry Ogier, (São Paulo) • Chile: Gideon Long China: Ruth Morris • Colombia: John Otis • Mexico: David Agren (Mexico D.F.), Nancy Ibarra (Monterrey) Peru: Lisa K. Wing, Ryan Dube • Spain: Sergio Manaut • US: Alejandra Labanca, Joseph Mann Jr. , David Ramírez, Álvaro Moreno (Miami), Mark Chesnut, John T. Sullivan (NY), Ángela María Riaño (Washington D.C.), Pablo Calvi, Isabel Piquer • Venezuela: Peter Wilson TRANSLATION: David Buchanan, Élida Bustos, Alejandra Labanca COPY EDITING: Ronald Buchanan, Liliana Tafur, Élida Bustos, David Seconi EVENTS & CONFERENCES PROGRAM MANAGERS Victoria Kenny, Yndira Marin EVENTS MARKETING MANAGER Suzana Fiat EVENTS EXECUTIVE Ileana Cutié SALES & CIRCULATION Miami/Pan-regional sales: Silvia Clarke, Senior Account Manager/Team Leader Mercedes Fernández, Business Development Director Andean region/Central America: María Cristina Restrepo, Manager Dubai: Stephen Dioneda Special Projects Coordinator: Rebecca Miller For advertising/sponsorship opportunities: rmiller@latintrade.com LATIN BUSINESS CHRONICLE Senior Marketing Associate: Rosemary Begg: rbegg@latintrade.com OFFICE MANAGER & CIRCULATION Claudia Banegas

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BUILDING THE NEW LATIN AMERICA: THE LEADERS THE COMPANIES THE PARADIGMS FOR SUCCESS

SAVE THE DATE OCTOBER 25, 2013 FOUR SEASONS HOTEL MIAMI The Latin Trade Symposium is the leading forum for discussion and debate about the Americas for the business and government community in the Region. Past speakers include: Policy Makers: • • • • •

Enrique Garcia, President and CEO, CAF Julio Velarde, Governor, Central Reserve Bank of Peru Bruno Ferrari, Former Minister of Trade and Investment, México Felipe Larrain, Finance Minister, Chile Fred Hochberg, Chairman and President, Export-Import Bank of the U.S.

Corporate Leaders: • • • • • •

Juan Benavides, Former CEO, Falabella Juan Pablo del Valle, Chairman of the Board, Mexichem Alejandro Ramírez Magaña, CEO, Cinépolis Susan Segal, President & CEO, Americas Society/Council of the Americas Woods Staton, President, Arcos Dorados Andres Gluski, CEO, The AES Corporation

Social Entrepreneurs: • Luanne Zurlo, President and Founder, Worldfund • Pilar Nores de García, President, Instituto Trabajo y Familia (First Lady of Peru) • Rebeca Villalobos, Founder, ASEMBIS, Costa Rica

Don’t miss this opportunity! For more information on registration or sponsorship opportunities, please contact Suzana Fiat sﬁat@latintrade.com

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THE SCENE

LATIN AMERICAN EXPORTS SLOWED IN 2012

ccording to the latest “Latin American commerce trends estimates 2012”, based on INTradeBID data on international trade from the Inter-American Development Bank, Latin American exports significantly dropped last year. Some countries even showed negative growth during the second half of the year. This explains the 1.5 percent growth in exports during the whole of 2012, reaching $1.1 billion, compared to a 26 percent growth for the previous two years. The countries with the slowest growth were in South America, as shown by Chile’s exports,

SMALL IS… NON-COMPETITIVE (Relative productivity in companies, according to size in percentages)

Microenterprises

small ﬁrms

mediumsized ﬁrms

large companies

Argentina

24%

36%

47%

100%

Brazil

10%

27%

40%

100%

Chile Mexico

26%

46%

100%

16%

35%

60%

100%

16%

50%

100%

EXPORT SLOWDOWN

Peru

Year-on-year monthly growth rates of exports in percentages. January 2008-October 2012

Germany

67%

70%

83%

100%

Spain

46%

63%

77%

100%

France

71%

75%

80%

100%

Italy

42%

64%

82%

100%

European Union

58%

74%

85%

100%

60% 50% 40% 30% 20% 10%

Source: Economic Commission for Latin America and the Caribbean, Eclac.

-10% -20%

which had a contraction of 6 percent, and Mercosur, with a 2 percent drop. In contrast, the region’s performance was stimulated by Mexico’s 6 percent growth, the Andean countries with 5 percent, and Central America with 6 percent.

-30%

Brazil

Chile

Colombia

Mexico

Jul-12

Oct-12

Jan-12

Peru

Apr-12

Jul-11

Oct-11

Apr-11

Jan-11

Jul-10

Oct-10

Jan-10

Apr-10

Jul-09

Oct-09

Jan-09

Argentina

Apr-09

Jul-08

Oct-08

Jan-08

Apr-08

-40%

Latin America

PRODUCTIVITY IN SMALL AND LARGE COMPANIES

Source: Inter-American Development Bank (IDB) integration and trade sector, based on ofﬁcial data.

Productivity levels vary widely in Latin America between small and large companies. “How to improve small companies’ competitiveness in Europe, Latin America and the Caribbean,” a study by the Economic Commission for Latin America and the

Note: The graph shows monthly year-on-year export’s growth from six Latin American countries and a weighted regional average. Latin America includes 11 countries, as well as those added to the graph, which are Costa Rica, Ecuador, El Salvador, Guatemala and Nicaragua.

THE GROWTH AND REDISTRIBUTION COMPONENTS OF MIDDLE-CLASS GROWTH IN LATIN AMERICA AND THE CARIBBEAN,1995–2010 US$10 to US$50 a day

Change in middle class (Percentage points)

20%

10%

in m Do

Redistribution

Growth

Source: Azevedo and Sanfelice (2012) based on SEDLAC (Socio-Economic Database for Latin America and the Carribbean) data.

LATIN TRADE MARCH-APRIL 2013

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gu ra

Pe ru

a m Pa

na Pa

ex i

as M

nd ur Ho

lv ad

ua do r El

bl ic Re pu

an ic

ca Ri st a

lo m

bi a

ile Co

il az Br

ca er i

tin La

tin

Am er

un tr ie n s Co u un n w tri ei e gh s te d Ar ge nt in a

-10%

THE SCENE

Caribbean, Eclac, shows that 85 percent of business leaders consider that the gap must be narrowed in order to make the region more competitive. The poll shows enormous differences in productivity between micro and small firms on the one hand, and large companies on the other.

LATIN AMERICA’S SOCIAL TRANSFORMATION In a recent study, the World Bank quantified the social impact of the growth of the middle class in Latin America. The process began in 2003, the study said. The transformation reflected a combination of more economic growth and less inequality. GDP per capita grew at a yearly rate of 2.2 percent between 2000 and 2010, while inequality dropped over the period in 12 of the 15 countries studied. The result was a reduction in poverty and unprecedented growth of the middle class.

THE INNOVATION GAP The manufacturing industry in Latin America posted an innovation rate in of 28 percent, according to the Inter-American Development Bank. In larger countries, 17 percent of all companies reported innovations in their products and production methods, compared with 12 percent in medium-sized countries and 7 percent in the Caribbean islands. The fact that 31 percent

of companies in large countries are reporting innovation in their processes suggests that they are making more complex products, all the while taking advantage of economies of scale. In contrast, the fact that 15 percent of Caribbean companies are reporting product innovation, without a process innovation to accompany it, implies the production of less complex products or simply copying existing ones.

DEMOGRAPHIC BONUS, THE BEGINNING OF THE END Latin America is reaching its demographic peak, Americas Market Intelligence stated in a recent report. The proportion of dependent to working-age population is reaching its highest possible level. This is a consequence of a notable drop in fertility rates. In countries such as Brazil, Chile and Mexico, it is slightly below the population replacement rate, which by definition is 2.1 percent. Moreover, “older” countries in the region, such as Argentina, Uruguay, Chile and Cuba, have entered their optimum demographic generation. Throughout Latin America, the proportion of young people reaching working age will be 53 percent of the total population in 2020, with positive side-effects such as a 4 percent drop in unemployment.

LATIN AMERICA IS REACHING ITS DEMOGRAPHIC PEAK Americas Market Intelligence

INNOVATION RATES IN LATIN AMERICA (PERCENTAGE OF FIRMS)

Source: IDB/Elena Arias Ortiz using Enterprise Surveys 2010.

LATIN TRADE MARCH-APRIL 2013

CORRUPTION IS GROWING (Again) IN LATIN AMERICA BY JOHN PRICE

atin America has achieved great things over the last decade: improved income distribution, less poverty, more home ownership, higher literacy, and a more robust democracy, among them. Corruption, on the other hand, has worsened. Comparing 2011 Transparency International Corruption index metrics with those of a decade earlier reveals a startling trend of increased corruption across much of Latin America, including IN markets that MIGHT surprise readers.

REVENUE HIDES ALL MANNER OF SINS Anyone who has managed a P&L knows that rapid revenue growth can lead to apathetic cost controls. In many Latin American countries, surging resource prices and economic expansion have stuffed tax coffers. Mining royalties in Peru, Argentine agriculture export taxes, Pdvsa, Pemex and Codelco profits are all examples of how governments are taxing the resource boom.

From 2004 to 2011, Latin American government spending grew on average more than 25 percent per year, measured in U.S. dollars. The extra cash has helped fuel a much needed expansion of infrastructure investment, but too often has included woefully corrupt projects. Periodistas Frente a la Corrupción (PFC) publishes a report every year highlighting literally dozens of cases of corruption that have actually been indicted. A still unfinished highway in Ecuador cost taxpayers $106 million when the winning quoted $36 million; in Guatemala, the Ministry of Communications awarded $27 million to fictitious suppliers linked to government officials; and in Venezuela, the massive public housing program paid close to $800 million to phantom companies as well as builders who never broke ground. These are just a handful of indicted cases, a drop in the veritable bucket of actual corruption, estimated by some to be anywhere from 5 to 10 percent of overall government spending and

LATIN TRADE MARCH-APRIL 2013

10 to 30 percent of infrastructure spending in Latin America. The greatest weapon against corruption, therefore, is austerity. Latin America became a more transparent region in the 1990s (versus the 70’s and 80’s) because low resource prices and aggressive debt servicing obligated governments to manage costs. By privatizing governmentowned resources, infrastructure, and manufacturing firms, many of the vehicles of corruption were taken away from their puppet masters. After a decade of prosperity¸ some Latin American leaders have deluded themselves into thinking that they can manage energy companies, mining operations, steel production, electricity distribution, ports, and highway tolls. The reversal of Latin America’s privatization trend is worrying on two fronts– it threatens the region’s competitive standing and provides new channels for government corruption.

THE CRIMINAL ELEMENT

producers. In the DR, the Russian mob is rumored to be involved in trans-shipment of cocaine to Europe. Across the region, organized crime operates with varying degrees of impunity. Underpaid government employees who supervise immigration, policing, transportation, utilities, and other functions are all vulnerable to the ‘plata o plomo’ tactics used by cartels. In the region’s smallest and poorest countries, like Guatemala¸ criminal tentacles are thought to have reached into the highest echelons of previous governments. But while drugs provide the source of profit for organized crime, the source of their legitimacy is the gap in government services that they fill. In countless rural communities it is often drug cartels that fund road building, schools and medical clinics as well as employ the fatherless young. It is no wonder, therefore, that governments struggle to uproot organized crime. For investors, Latin America represents a perplexing dichotomy. On the one hand, strong resource prices, an expanding middle class, and rising discretionary consumption present tantalizing opportunities to global companies. But fortune-hunting businesses must contend with increasing corruption, and not just when trying to sell goods and services to governments. Wherever government oversight is needed-- to obtain a permit, import a component, inspect a facility, or police a district-- the specter of corruption is near.

Organized crime is another important pillar of corruption. While the Colombian, Peruvian, and even Bolivian governments managed to pulverize the power of cocaine cartels, those managing distribution channels for the drug have become the enemies of the state in other countries. In Central America, Mexico, Venezuela, Trinidad and Tobago, Jamaica, Bahamas, the Dominican Republic, Paraguay, Argentina, and Brazil, organized crime has grown and become more consolidated, fueled by the incredible profits of drug trafficking and distribution. Per capita cocaine John Price is consumption in Buenos Aires is the managing now believed to exceed that of director of Americas most U.S. cities. In Jamaica, the two Market leading political parties are both Intelligence accused of taking contributions and a 20-year from rival street gangs who control veteran of Latin the nation’s drug trade. Venezuela’s American competitive intelligence military leaders are accused by some and strategy consulting. of colluding with Colombian drug jprice@americasmi.com

PHOTO: ©ISTOCKPHOTO.COM/ P_WEI

THE CONTRARIAN

SECTOR REPORT: MERGERS AND ACQUISITIONS

LATIN AMERICA LEADS THE

M&A REVIVAL The bulk of the major acquisitions were in Brazil, Mexico and Chile. Top buyers were in Brazil and the United States, though Colombia was a surprise player.

his year began with a bang in the world of mergers and acquisitions. The 3G investment arm of Brazil’s wealthiest man, Jorge Paulo Lemann, is joining forces with Warren Buffet’s Berkshire Hathaway to buy Heinz for $28 billion. The deal heralds what is expected to be a year in which M&A in Latin America will break its existing record, achieved only 12 months ago as shown by Latin America’s top 100 M&A, a ranking from Latin Business Chronicle. Latin America will thus take a head-start in a worldwide trend. Auditors KPMG reckon that this year will see a recovery of M&A not seen since the peak in 2007. Last year, M&A in Latin America came to more than $92 billion, an extraordinary figure that does not include Mexico’s biggest ever deal, the acquisition of 50 percent of Grupo

Modelo by Belgium’s Anheuser Busch InBev for more than $20 billion. That deal, currently delayed over regulatory scrutiny, would have accounted for 22 percent of the value of all M&A in Latin America last year. Brazil is easily the top seller. Last year, 51 major Brazilian companies were sold for a total of $38.5 billion. Chile was number two with 12 deals for a total of $10.7 billion, followed by Mexico — minus the Grupo Modelo acquisition — which recorded 13 deals for a total of $9.3 billion, and Colombia came in fourth with eight deals for a total of $6.8 billion. As for buyers, Brazil once again was the big winner in Latin America’s biggest 100 M&A deals, with $20.3 billion in 26 acquisitions, followed by the United States with 14 deals for a total of

LATIN TRADE MARCH-APRIL 2013

$14 billion. The number two buyer in the region was Chile with $8 billion in six operations. Colombia took a surprising third place with $8 billion in six deals, beating Mexico with six deals for a total of $4.3 billion. Worthy of note is that China does not appear in the list of the major buyers of Latin American companies. The Asian giant came in a fairly dismal ninth place on the list; this time around, there can be no talk of Chinese corporations buying up the continent. All these deals point to a new look for the economic dynamics of Latin America. Apart from the Modelo deal, the biggest in Latin America last year was the $6.8 billion domestic Brazilian takeover by Itaú Unibanco of Redecard. The transaction increased Itaú’s share in the debit and credit card business that

should eventually boost its fee-based revenues. The health industry had a salient place in the list of last year’s mega deals. Minnesotabased United Health Group, the biggest health insurance company in the US, paid $4.5 billion for the largest Brazilian managed-care operator, Amil Participações. United Health thus gained access to the private-insurance market in this emerging economy, a strategy that the company had already tested in India and China. Chilean state-owned miner Codelco and US-based Anglo American ended in August a 10-month rift over a mining property in Chile. Under the terms of the peace pact, Anglo American reduced its stake in the Sur copper complex to 50.1 from 75.5 percent, while Codelco and partner Mistsubishi increased it through

PHOTO: ©ISTOCKPHOTO.COM/EMILIE DUCHESNE

BY ÁLVARO MORENO

SECTOR REPORT: MERGERS AND ACQUISITIONS

Everything points to a key year for M&A throughout the world. the acquisition of a 29.5 percent share. Chilean retailer Cencosud acquired the Colombian operation of French retailer Carrefour. The Colombian subsidiary will now have to improve substantially its $100 million yearly Ebitda to provide a reasonable return for the $2.6 billion deal, which was the fifth largest in Latin America last year. Cencosud is betting on the growth of the middle-class in Colombia to accelerate its revenue generation.

HSBC helped broker a deal between American paint company Sherwin-Williams and Mexico’s biggest paint company Consorcio Comex. Sherwin-Williams agreed to acquire Comex for $2.34 billion, the largest coatings transaction ever in Latin America. The acquisition was also the largest investment bank-driven sale in Mexico in 2012. HSBC was the sole financial advisor to Comex, a family owned company, during the sale. The last deal with a price

tag greater than $2 billion was the sale by Brazilian tycoon Eike Batista of a stake in his EBX conglomerate to Abu Dhabi state investment fund Mubadala. The deal is also the biggest ever in Latin America by the $46 billion Middle Eastern fund. The proceeds were to be used in EBX’s projects in ports, mines, oil and energy. Although last year set a Latin American record for M&A, there were only half as many deals of more than $2 billion compared with 2011.

However, the top ten deals in 2012 came to $47 billion, almost the same as the $47.6 billion of the previous year. Everything points to a key year for M&A throughout the world. One sign is that, while the first three quarters of 2012 fell by 17.4 percent compared with the same period of 2011, the final quarter was the best of any quarter in the last four years. There is every reason to expect that Latin America will continue with the trend set last year. Álvaro Moreno reported from Miami.

LATIN AMERICA’S TOP 100 M&A’S (2012) Latin America’s Top 100 Mergers & Acquisitions in 2012 ranked by value in millions of US dollars. RANK TARGET, COUNTRY

ACQUIRER, COUNTRY

DEAL VALUE $20,093

Grupo Modelo, Mexico

Anheuser-Busch Inbev, Belgium

Redecard, Brazil

Itau Unibanco Holding, Brazil

$6,822

Amil Participações, Brazil

UnitedHealth Group, United States

$4,981

Anglo American Sur, Chile

Codelco, Chile / Mitsui & Co., Japan

$2,900

Carrefour Colombia

Cencosud, Chile

$2,614

Consorcio Comex, Mexico

The Sherwin-Williams Co., United States

$2,340

Grupo EBX, Brazil

Mubadala Development Co., United Arab Emirates

$2,000

Comgás, Brazil

Cosan Indústria e Comércio, Brazil

$1,782

Afore Bancomer, Mexico

Afore IMSS-Banorte, Mexico

$1,735

OHL Brasil, Brazil

Abertis Infraestructuras,Spain /Brookﬁeld Infrastructure, Canada

$1,677

Serasa, Brazil

Experian Brasil

$1,530

AFP Cuprum, Chile

Principal Financial Group, United States

$1,378

Helm Bank, Colombia

CorpBanca, Colombia

$1,279

Grupo Costanera, Chile

Canada Pension Plan Investment Board, Canada

$1,174

CELPA, Brazil

Equatorial Energia, Brazil

$1,139

Sources: Thomson Reuters, Latin Business Chronicle © Copyright Latin Business Chronicle

MARCH-APRIL 2013 LATIN TRADE

INDUSTRY REPORT: COFFEE

COLOMBIA’S BITTER HARVEST

Inefficiencies, low international prices, bad weather and an overvalued currency led to a slump in once buoyant exports.

n the land of Juan Valdez, the average cup of coffee is now brewed with beans grown in neighboring Ecuador and Peru. That might seem like sacrilege, but a combination of heavy rains, diseased trees, low international prices and an overvalued currency has hollowed out Colombia’s coffee industry and led to a steep drop in production. Last year’s output of 7.7 million 132-pound bags of coffee was a three-decade low. In 1992, Colombia produced more than twice that amount. As a result, Colombia has fallen from third to fifth place among world producers, behind Brazil, Vietnam, Indonesia and Ethiopia. And because most Colombian coffee is highend washed arabica beans that are exported, the country has scrambled to import the lowergrade beans consumed by most Colombians. “We have had major problems with the climate which provoked a production crisis,” said Luis Fernando Samper, a spokesman for Colombia’s national coffee growers’ federation. “The recovery has started but we are now being hit with price and foreign-exchange troubles.” The steep drop in production began in 2009 with several successive years of heavy rains. Besides damaging plantations, the flooding and

LATIN TRADE MARCH-APRIL 2013

landslides destroyed roads and bridges, making it harder to get the coffee crop to market. The heavy rainfall was a key factor in the spread of a fungus known as coffee rust, which is especially harmful to arabica beans. Efforts to combat the disease by planting 2 billion trees resistant to coffee rust are expected to help. But the new trees require about 12 months to begin to produce. Meanwhile, the Colombian peso has been steadily appreciating amid an oil and mining bonanza that has brought in billions in foreign investment. Four years ago, the exchange rate was about 2,300 pesos per US dollar. Today, the rate stands at about 1,785. As a result, Colombia’s coffee exports are worth far less. “Among the region’s coffee producers, our currency has appreciated the most,” Samper said. Last year alone the peso gained 10 percent against the dollar. Then there’s the international market rollercoaster. World coffee prices have plunged 35 percent from a year ago due, in part, to expectations of a bumper crop in Brazil, the world’s largest grower. Brazil’s agriculture ministry predicted that the nation’s 2013 output may reach 50.2 million bags, slightly lower than its

2012 record of 50.8 million bags. “This Brazil crop is going to be a monster,” Joe Scaduto, a coffee broker at New York-based JPS Commodities, told Bloomberg. The boost from Brazil will push up world production this year to an estimated 144.5 million bags, a 7.3 percent increase from a year earlier, according to the London-based International Coffee Organization. Colombia is not the only Latin American nation weathering a coffee crisis. In recent months, officials in Costa Rica, the Dominican Republic, El Salvador, Guatemala and Honduras have declared states of emergency due to coffee rust attacks that could severely damage crops in 2013 and 2014. According to the president of the farmers’ union of El Salvador, Alvaro Fiallos, more than 41,000 hectares of coffee have been lost there because of the fungus. Costa Rica’s coffee institute estimates that rust will be responsible for a 10 percent decline in the country’s coffee harvest. In Guatemala, the national coffee association said that rust disease will destroy about 15 percent of this year’s harvest and a whopping 40 percent of next year’s crop. President Otto

PHOTO: ©ISTOCKPHOTO.COM/ JOSÉ MANUEL FERRÃO

BY JOHN OTIS

INDUSTRY REPORT: COFFEE

PHOTO: LUIS EDUARDO NORIEGA/NEWSCOM

“We are in a very difﬁcult situation,” said Tiberio Nieto, 57, who is losing money on his three-hectare coffee farm in the central department of Huila. “It just costs too much to produce coffee right now. Most coffee farmers view what the president offered as just crumbs.”

Perez Molina said the government will set aside about $13 million to buy pesticides and provide support to growers. “This is not a problem just for coffee growers, it’s a social problem that will have side effects and mean the loss of jobs,” Perez Molina said. In Colombia, some coffee farmers are growing desperate despite government efforts to prop up the industry. During a February visit to the department of Caldas, the heart of Colombia’s so-called coffee belt, President Juan Manuel Santos extended a program until July that pays farmers a $16 per bag subsidy. He also announced the formation of a commission to address the crisis. Meanwhile, the central bank has pledged steps to reduce the value of the peso. “We know coffee farmers are struggling,” Santos told growers in the town of Chinchina. “But we are working hand-in-hand to make progress in the coffee industry, and hence the country.” Still, many growers in the crowd remained unconvinced and booed Santos. Many complained that even with the production subsidy they were losing money and demanded a government-mandated floor price. So far in 2013,

the peso has weakened only slightly. Most of Colombia’s 570,000 producers are small-scale farmers with fewer than five hectares. According to the head of the state-run agricultural bank, coffee growers owe the country’s banks $728 million in unpaid loans – or about $1,200 per farmer. To call attention to their plight, farmers in 12 coffee-producing departments were planning massive protests, including the blockage of main roads and highways. “We are in a very difficult situation,” said Tiberio Nieto, 57, who is losing money on his three-hectare coffee farm in the central department of Huila. “It just costs too much to produce coffee right now. Most coffee farmers view what the president offered as just crumbs.” Even if they survive the bad weather and low prices, Colombian coffee growers face structural problems. Due to a lack of investment, the slow pace of replacing aging trees and the small size of most farms, Colombian coffee production is simply not efficient, according to Carlos Rojas, executive president of the association of coffee exporters. At the same time, rural-to-urban migration in the traditional coffee-growing departments of Antioquia, Caldas, Risaralda and Quindio has led to labor shortages and rising costs. Colombian farmers produce 8.3 bags of coffee per hectare, Rojas said. That compares to 12.4 bags in Guatemala, 16 in Costa Rica, 17

in Honduras and 22 in parts of Brazil, where unlike Colombia and Central America the industry is mechanized. In a speech last year, Agriculture Minister Juan Camilo Restrepo suggested that Colombia’s veteran coffee growers may be resistant to modernization. He pointed out that the average age of a coffee farmer in Vietnam – which rapidly emerged over the past two decades to become the world’s No. 2 producer – is 30 while the average age of Colombian coffee farmers is 50. Compared to Brazil, Guatemala and other countries, Colombia’s coffee industry is overregulated and somewhat unfriendly to investors, according to Rojas. For example, due to a 10-cent price premium paid for Colombia’s washed arabica beans, there are limitations on what farmers are allowed to grow and export. However, international demand for lower-grade robusta and unwashed arabica beans is growing faster than the market for washed arabica. Fifteen years ago, arabica accounted for 65 percent of the coffee market compared to 35 percent for robusta. Since then, arabica has fallen to 59 percent while robusta now holds 41 percent of the market share. “Colombia has focused on the market that is growing the slowest,” Rojas said. From a business perspective, it makes more sense to move into areas with a better long-term outlook.” John Otis reported from Bogota.

Hundreds of farmers and indigenous people take part in a demonstration in Bolombolo, located in Antioquia, Colombia. The National Movement for the Defense and Dignity of Coffee, formed in 2012 by farmers of the main coffee departments, called a work stoppage after considering that the government neglected the needs of the guild.

MARCH-APRIL 2013 LATIN TRADE

WORLD ECONOMIC FORUM: INTRODUCTION

Latin America’s future is more predictable than many people believe. The world’s economic and demographic forces are inexorable drivers of the region’s major trends, which fortunately appear to point toward progress.

rbanization is one of the driving forces. The world’s cities

on the planet’s resources. At present, the population’s demand

are growing at the pace of two inhabitants per second,

for natural resources is growing 50 percent faster than nature is

according to the US National Intelligence Council. In China,

capable of regeneration.

20 million people a year move into cities, as a Latin Trade report

Business people in Latin America thus confront the challenge

has pointed out. Another driving force is the improvement in

of making full use of all the opportunities offered by the future in

people’s incomes. By 2030, most of the world’s inhabitants will be

terms of primary goods, the urbanization of medium-sized cities

middle class, the NIC reports. Ofﬁcial data from Brazil, for example,

and consumers’ earnings. They will also have to face the challenge

show that 35 million people have been hauled out of poverty over

of keeping competitive in terms of innovation, generate jobs and

the last 10 years, and more than a half of the population now

reduce informal employment, while skillfully managing natural

receives more than $145 a month, the minimal threshold for

resources — among them water, perhaps the most important. All

belonging to the middle class.

of that can ensure sustainability.

These two trends will ensure sustained demand for the natural

This, at least in part, is the subject matter of the World

resources and primary goods that the region exports. Demand for

Economic Forum in Lima. Latin Trade has been a member

food will grow by 35 percent and by energy for 50 percent the world

of the forum since ﬁve years ago. The following articles are

over during the next 15 years. But all this will exert more pressure

precursors to the debate.

LATIN TRADE MARCH-APRIL 2013

PHOTO: ©ISTOCKPHOTO.COM/ JENNIFER MCCORMICK / MARCO VOLPI

SUSTAINABLE GROWTH

WORLD ECONOMIC FORUM: LATIN AMERICA

SMALL CITIES BIG CHALLENGES

Rapid growth of mid-size municipalities opens up great opportunities for business BY LISA K. WING

iego Roca was happy to open a T.G.I. Friday’s in the Peruvian city of Arequipa in early 2011. Yet, a year after operating the casual restaurant, municipal authorities suddenly revoked its permission to stay open until one o’clock in the morning. It took a year to obtain the necessary late license, even though the restaurant was located in a shopping mall that had a 24hour operating permit. But Roca still believes that the benefits of setting a foothold in Arequipa outweigh the complications encountered along the way. Indeed, despite the challenges that come with investing in secondary cities in Peru and elsewhere in Latin America, companies are increasingly channeling time and money into them. The reason is that they provide business opportunities that are no longer available in the region’s rapidly saturating capital cities. “The expansion into certain medium-size cities in the region is very interesting from a business perspective because in many cases these cities are largely unattended, which provides an opportunity to position the brand as a leader,” notes Paul E. Palacios, executive director of Ecuador-based investment banking boutique Palacios Martínez. “Generally, cities that have barriers to entry eventually become centers of stable demand and high margins.” Intermediate-sized cities are emerging

as the new poles of economic development in Latin America. According to the InterAmerican Development Bank (IDB), the urban population of Latin America and the Caribbean increasingly consists of residents of cities with a population of between 100,000 and two million people. Taken as a whole, the region is already the second most urbanized on the planet, having gone from a 62 percent proportion of city-dwellers in 1980 to 81 percent in 2011. “There is an accelerating trend towards urbanization in Latin America that has brought about good things but also less desirable side effects such as disorganized and chaotic growth,” says Ellis Juan, coordinator for the IDB’s emerging and sustainable cities initiative. “This is reflected in the access to public utilities, health and education and in more worrisome issues such as informality and crime.” “One of [the program’s] biggest challenges is to provide productive employment to people living in these cities: to have them evolve from being mere inhabitants of a city to becoming citizens,” explains Juan, who has overseen the implementation of the initiative in five pilot cities in the region — in Peru, Trinidad and Tobago, El Salvador, Uruguay and Brazil — and expects to involve a total of 26 cities in the region by 2015. The other big challenge, he notes, is

improving the fiscal capacity and independence of municipal governments so that they can fund and maintain urban and social services — ideally partnering with the private sector — and adequately control spending and debt. Antonio Celia, president of Promigas, a natural gas distribution company based in Colombia, says private-sector participation is key to confronting the challenges that arise from rapid urbanization. “Firms should become more actively involved in the growth process of these cities because the environment in which they operate is all too important,” notes Celia, whose company began investing in intermediate-size cities in Colombia more than 25 years ago. “Everyone wants to have a better quality of life in the city where they are.” However, the learning curve from investing in emerging cities in the region can be steep. As Peruvian business executive Andrew Michell points out: “If a company weighs in, the probability is that it will take time for infrastructure developments to arrive, that municipal institutions are weak, and that finding qualified workforce won’t be easy. But it most likely will still make sense to invest in these cities because there is growth there.” Real growth, the one fueled by the fact that there are more people making money. Lisa K. Wing reported from Lima.

MARCH-APRIL 2013 LATIN TRADE

WORLD ECONOMIC FORUM: ENTREPRENEURSHIP

THE CREATORS OF GROWTH F

rom street vendors to multinational businesses, Latin America abounds in entrepreneurial success stories. But many of the region’s government and business leaders say more must be done to promote new ventures that can drive future growth. In Mexico, the creation of 50 large firms a year could increase the gross domestic product by 1 percent, according to Endeavor, a global organization that promotes growth through entrepreneurship. In Brazil, more than half of the country’s formal workforce is in small businesses, says Sabrae, an organization that supports them. More and more, Latin Americans are looking at entrepreneurship as a career choice. In Colombia, 57 percent of the population between 18 and 64 years old plans to start a business in the next three years, compared to 13 percent in the United States, the latest data from the Global Entrepreneurship Monitor project shows. While the business drive in Latin America is striking, the region still needs a more entrepreneur-friendly environment. Start-ups often face higher hurdles than their counterparts in developed countries, including excessive bureaucracy and a lack of private venture capital. The average time to start a business in the region is 53 days, more than four times that of industrialized nations, the World Bank says. But while the regulatory environment could be more conducive to building businesses, attracting and developing human capital looms large as a key for creating new companies and jobs during the next decade. Some governments have taken the lead on this, setting up programs to attract highly-innovative entrepreneurs from around the world, including those that are struggling to get their ventures off the ground in the US and Europe due to the financial crisis and immigration laws that often

LATIN TRADE MARCH-APRIL 2013

exclude, rather than attract, foreign talent. In Chile, the government hopes that a new program will make it Latin America’s entrepreneurial hub. In 2010, the government launched Startup Chile, which provides earlystage entrepreneurs with $40,000 of equity-free seed capital and a one-year temporary visa. The program aims to provide support for 1,000 entrepreneurs by the end of next year.

Non-profit organizations, often run by business leaders, are also working to foster entrepreneurship by providing mentorship for youth and early start-ups. One example is Junior Achievement, a US-based non-profit that develops entrepreneurial skills around the world. JA gives young people between 15 and 25 years old the opportunity to start a small company and receive mentorship from local business leaders. In Latin America alone, about a million young people pass through JA’s program every year, building businesses that sell everything

from jewelry to software, says Sean Rush, the president and chief executive of JA Worldwide. “The young people learn by their successes and failures, and also just by getting their fingernails dirty,” he said. While some participants go on to develop their businesses after the program ends, those that don’t also benefit by learning skills that can help their future employers be more competitive. “By virtue of going through these programs most of these young people are quite ready for the workforce,” says Rush. “They develop a set of skills that will enable them to be highly effective employees.” Endeavor is another organization supporting entrepreneurs. Andy Freire, a well-known Argentine businessman and chairman of Endeavor in that country, says that while there is no silver bullet to ensure entrepreneurial success, the development of “high-impact” entrepreneurs will be key for creating jobs and further growth in Latin America. In contrast to other entrepreneurs, including many of those that run micro-businesses, high-impact entrepreneurs are individuals that build firms that generate millions in revenues and employ hundreds of people. “High-impact entrepreneurs can move and transform an industry or a country quite dramatically,” Freire says. To foster high-impact entrepreneurship, Freire points to the need for better mentoring and education. “There is plenty of entrepreneurial spirit, plenty of people starting their own ventures, but very few succeeding and that goes back to the issue of education,” he says. Latin American universities, for example, could play a bigger role in turning out more entrepreneurs, Freire says. “A holistic approach is needed to reduce the height of the hurdles that entrepreneurs need to jump, and at the same time encourage entrepreneurs to jump higher,” he adds. Ryan Dube reported from Lima.

PHOTO: ©ISTOCKPHOTO.COM/ AYKU T67

BY RYAN DUBE

Latin America is brimming with would-be entrepreneurs, but not enough is being done to promote them.

Through â&#x20AC;&#x153;Performance with Purposeâ&#x20AC;?, PepsiCoâ&#x20AC;&#x2122;s goal is to deliver sustained financial performance by: providing a wide range of foods and beverages from treats to healthy eats; finding innovative ways to minimize our impact on the environment and lower our costs through energy and water conservation as well as the reduced use of packaging material; providing a safe and inclusive workplace for our employees globally and by respecting, supporting and investing in the local communities in which we operate.

WORLD ECONOMIC FORUM: INNOVATION

INNOVATION OR BUST New technologies, marketing methods and business processes are advancing in Latin America, but they need to match those of developed nations and Asia BY RYAN DUBE

LATIN TRADE MARCH-APRIL 2013

dinary profits that they are getting to invest in industries that add value, to foster innovation,” she said. There are several ways to promote innovation, but perhaps chief among them is education. Numerous studies have found that the educational systems in Latin America lag behind those of other regions, especially at the post-secondary level. While part of the problem may be a lack of engineers and other professionals, poor coordination between university research centers and businesses can also limit innovation. Another hurdle is that many countries haven’t developed a strong patent system that can help promote and spread innovation. “There is no tradition of applying for patents,” Casanova said. “The whole process is very cumbersome and expensive.” Looking forward, Latin America has several opportunities to produce world-class innovations, especially with green technologies and in relation to social media. The region is already at the forefront of the development of green technologies. Brazil’s agricultural research corporation, Embrapa, helped develop the country’s ethanol industry, one of the world’s largest, through its research in the agricultural sector. Chile’s copper industry, the world’s biggest, has added value by supporting the use of copper cages in that country’s salmon industry. Copper cages are better for the health of the fish and are more environmentallyfriendly. For social media, Brazil stands out as the world’s second biggest market for Facebook, and a major market for YouTube and Twitter. “How much innovation will come from that, of course, remains to be seen, but Brazilians are always very up to date with

the latest technology,” said Casanova. Further innovation opportunities exist with branding, which could support the development of more international Latin American firms. Latin America already has several companies that have spent billions of dollars on acquisitions and mergers during the past decade to expand abroad and position themselves as global leaders in their sector, competing with Western and Chinese multinationals. A good example of innovative branding has boosted the global influence of Peruvian cuisine. In the past decade, Peruvian chefs, led by Gaston Acurio, have successfully promoted the Andean nation’s food as an international cuisine of choice. Acurio now has restaurants throughout Latin America, as well as in Europe and the United States. Other Peruvian chefs have followed in his footsteps. The upcoming World Cup and summer Olympics will be an opportunity for Brazil, and the region, to innovate with branding. “Latin America has a lot, but much of it still isn’t wellknown,” said Casanova. “The World Cup and the Olympic Games are a tremendous opportunity for Brazil and South America to brand themselves.” Ryan Dube reported from Lima.

PHOTO: ©ISTOCKPHOTO.COM/ AKINDO

n 2012, in one of his last speeches as the chief economist of the World Bank, Justin Yifu Lin warned Latin American countries that they risked being stuck in a middle-income trap due to a lack of innovation. Like Lin, many government and business leaders in Latin America have pointed to the need for more innovation to create competitive businesses and diversified economies. Economists and policy makers have questioned whether the region’s robust growth during the past decade, driven by China’s demand for natural resources, will be sustainable unless new technologies, marketing methods and business models are developed. The region is already facing challenges from stronger currencies that have made exporters less competitive, while an inflow of cheap Chinese imports has hurt some Latin American manufacturers. Innovation that improves productivity and opens up new markets for Latin America is seen as a key to addressing these challenges. While Latin American leaders recognize the need for innovation, the region still lags behind developed countries and emerging nations in Asia. Latin American investments in research and development account for an average of 0.3 percent of the region’s gross domestic product, compared to an average of 2.33 percent for OECD countries, according to a 2011 report by the OECD and Insead business school. To be sure, Latin America has made strides in innovation over the past decade. Argentina, Brazil and Chile have set up government agencies to coordinate policies that promote scientific research and technological development, while adding value to commodities. Several Latin American companies, such as Brazilian aircraft manufacturer Embraer, Mexican cement producer Cemex, and Peruvian beverage firm Aje Group, are among global leaders in their sectors thanks to innovations in business models and marketing. However, Lourdes Casanova, a senior lecturer of management at Cornell University and an expert on business innovation in Latin America, says that more can be done to ensure the current growth is sustainable. “All of these countries have to take advantage of the extraor-

WORLD ECONOMIC FORUM: WATER

A THIRSTY CONTINENT? Some Latin American countries, though not all, have managed water supplies efficiently, though once-abundant resources could be in short supply. BY ÉLIDA BUSTOS

LATIN TRADE MARCH-APRIL 2013

Ceará and São Paulo as pioneers, has been transparent and successful. Kemper mentions other examples of good water administration such as Mexico, which has 6 million hectares under irrigation. “Few countries have that big an irrigated area,” she says. Another example is Peru, whose good management of water in fertile areas has contributed to exports.

RESERVES At present, Latin America has plenty of water available per person: almost five times as much as the world average. But the experts agree that, beyond the successful examples, there are disparities in water management in some Latin American countries and even in some regions within the same country. Andrei Jouravlev, economic affairs officer of the division of natural resources of the Economic Commission for Latin America, thinks that what’s required to optimize the use of water in the region is good institutional management. That means better laws, regulations, agencies and qualified personnel, as well as investment in construction, operation and maintenance of infrastructure. “The region has advanced in recent decades,” he says, “but still there are large shortcomings. The institutional management systems are usually weak, underfinanced, with poor information, severe limits in the capacity for control and inspection, and there’s a huge shortage of infrastructure,” he told Latin Trade. More than 32 million people in Latin America still lack access to potable water,

almost 121 million have no basic sanitation facilities, and more than 70 percent of the water delivered in urban areas is discharged into nearby waters without treatment, causing serious problems of pollution. Climate change is also having a negative effect on water reserves. “One can imagine the future scenarios,” says Kemper. And then there is the situation of the glaciers, previously regarded as the reservoir of fresh water in this part of the world. The glaciers from the highest peaks in the Andes are retreating due to global warming, and in desert areas or flood plains this is aggravating these trends. This indicates that “it’s essential to speed up the improvements, because we don’t have as much time as we thought,” says Kemper. Élida Bustos reported from Buenos Aires.

PHOTO: ©ISTOCKPHOTO.COM/ VJOM

ith a current population of 609 million, projected to grow to 750 million by 2050, plus the rapid advance of urbanization and industrialization in the region, water is definitely on the political agenda in Latin America. The Inter-American Development Bank and the World Bank agree: For years they have financed programs and specific studies to improve water use in the region. Latin America “includes examples of countries that are quite advanced in water management,” says Karin Kemper, sector manager of environment and water resources for the World Bank’s Latin American region. “Other countries are looking at Latin America to learn.” Kemper, who did her doctorate in water management in Brazil, cites as a prime example the country’s management of its river basins. “In the last 15 years they have built a form of participatory management at the river basin level that’s an example for the world,” she says. The highlight of the Brazilian experience is that in each region there is a collective administration compiled of the users — including producers, consumers, water companies, and state or national authorities — that decides how best to use the water. “There is a federal law and state laws that try to organize the management of the river basins among the different user groups. If you have a river that runs only through one state, the state is responsible for this river, but if the river basin covers at least two states, then it’s a federal basin,” she says. She says that this administrative system, with the states of

WORLD ECONOMIC FORUM

WHAT LATIN AMERICA SHOULD KNOW ABOUT THE CONCLUSIONS OF THE

WORLD ECONOMIC FORUM’S

ANNUAL SUMMIT

The message from Davos

he atmosphere at the 43rd edition of the World Economic Forum at Davos at the beginning of the year was one of calm optimism. The positive view prevailed despite an awareness of the main concerns that are facing companies and governments and that remained top of the forum’s agenda — such as the crisis in Europe, the US fiscal deficit, geopolitical tensions in the Middle East and the growth of protectionist tendencies. Even so, there continues to be good news for the emerging economies. The large Chinese contingent in Davos presented a growth forecast for this year of some 8 percent, with inflation pegged at 3 percent. Domestic consumption and the services sector will be the principal motors of growth, with a trend toward a reduction in the balances of the trade and current accounts, all of which is good news for the world economy as a whole with a direct impact on Latin America which has forged ever closer relations with China over the years. Last year, 12 million jobs were created in China and growth in the private sector is growing faster than in the state enterprises. China is also building itself up as a relevant trade and investment partner of Africa, which has become the world’s most rapidly growing region in economic terms, with a 5.3 percent forecast for this year. African institutions, meanwhile, are still lacking in support for the stability that is required to encourage long-term investments. Some countries are consolidating their democracies while others face such structural challenges as low levels of public health and education services as well as high levels of corruption. In that sense, Africa faces similar challenges to those observed in Latin America, which likewise has contrasts, with some countries that are developing while others that need to make progress in structural and institutional aspects. In a global context, the multilateral commercial system is under threat from the impasse on the Doha Round and the proliferation of bilateral, regional and multilateral accords. Talks among the Asean bloc in Southeast Asia, involving Japan, India, China, South Korea, Australia and New Zealand could lead to a free-trade zone from 2015 that would include half of the world’s population. Another example is the TransPacific Partnership, which includes the United States, Australia, Canada and eight other countries, includ-

LATIN TRADE MARCH-APRIL 2013

ing three from Latin America: Chile, Peru and Mexico. Finally, there are the recent announcement of talks aimed at forming a free-trade zone between the United States and Europe. If all these developments bear fruit, the nations of the Mercosur will have to ensure avoiding be left in isolation as these major multilateral initiatives take shape. With only a few months to go before a change in its leadership, the World Trade Organization faces major challenges. There is a growing consensus that, in addition to the regulation of import tariffs, other aspects are being brought to bear on international trade. These include, for example, non-tariff measures and the disequilibrium among exchange rates. What that means is that an agenda that facilitates trade — better infrastructure, less red tape, more use of computers, the elimination of non-tariff barriers, and so on — has a potentially much greater impact than a straightforward reduction in tariffs. Unity on that front might well be a strategy that could reach intermediate targets and defend multilateralism. Another talking point in Davos was the need to wipe out the corruption that continues to persist in several parts of the world. Studies by Transparency International, widely accepted as the authority on the issue, show that credibility in governments and companies is historically low. At the same time, society at large is demanding more transparency in the broadest sense of the word, with improved governance in both the public and private sectors. On the question of the deadline on sustainable development after 2015, there is consensus on the importance of maintaining efforts to achieve, as well as review, the Millennium Goals, despite an awareness that it is no longer possible to achieve them in full. Environmental issues, meanwhile, are losing impetus as the developed countries remain reluctant to assume commitments on the “de-carbonization” of their economies and invest much more on the development of new technologies. The absence of a clear vision on the ways to pursue a solution to the problem has reduced the weight of the consensus and the need to take urgent action in order to thrust it back into the global agenda. * Federico Fleury Curado is president and chief executive of Embraer, as well as joint chairman of the World Economic Forum 2013

PHOTO: COURTESY OF EMBRAER; ©ISTOCKPHOTO.COM/ MICHAEL MONU FERRÃO

BY FREDERICO FLEURY CURADO *

INDUSTRY REPORT: COMMODITIES

After the worst drought in over 50 years in the United States lifted soy prices to an all-time high, sowing soybeans promises land owners in Brazil, which is expected to surpass the U.S. as the world’s largest soy producer, three times the returns that grazing cattle on grass can.

TOUCH AND GO FOR GAINS IN GRAINS South American farmers have a lot to gain from the US drought, if only they can break free of the red tape that hinders them.

he worst drought in decades in the United States is opening up new opportunities for South American grain and bean producers, but farmers warn that the same erratic weather patterns hitting the north could unleash fury on their fields. In addition, government meddling and poor infrastructure pose major challenges to their harvests. This year, Brazil is widely expected to overcome the US as the world’s top soybean producer with a record crop of 83.5 million tons, compared with 82.06 million ton output from American farmers. And President Dilma Rousseff has proudly proclaimed that the country is heading for a record harvest of grains and beans totaling 185 million tons. “The severe climate conditions that struck the main US agricultural belt last year have played a major role in South American farmers’ decision on what to sow in 2013 and coming years,” Thiago Masson, trade coordinator for Brazil’s farmers’ association, told Latin Trade. But in Brazil the 10.4 percent growth in the area planted with soybeans comes at the expense of other products. The area planted with wheat is declining by 12.5 percent and with cotton by 29.9 percent. Corn remains essentially unchanged, Masson said. On the other hand, in neighboring Argentina, the world’s number three soybean supplier, earlier hopes for an unprecedented 57 million ton output, just at a time of solid global prices due to climate conditions in the US, are now fading for lack of rain. Consequently, the Buenos Aires Grain Exchange is revising down its forecast to a more modest 50 million tons. “While we are still expecting good [grains and beans] harvests, there are areas where there’s too much water, and others where there’s too little,” Daniel Pelegrina, deputy chairman of Argentina’s

LATIN TRADE MARCH-APRIL 2013

leading farmers’ association, told Latin Trade. “You have to be very cautious when making predictions.” Adding to Argentine farmers’ problems, government meddling in the form of export quotas, export tariffs of up to 35 percent for soybeans, and foreign exchange restrictions make planters’ lives difficult, Pelegrina said. Argentina is the world’s number one supplier of soymeal and soy oil, while the bean and its derivatives are by far the country’s largest money earners, though tensions are permanent in relations between the government and producers. Number four soybean exporter Paraguay is aiming for a record 8.4 million ton crop, according to official figures. However, lack of rains and hot weather are posing a major threat to areas in the north that are yet to be harvested, farmers’ leaders warn. Comparatively tiny Uruguay, the world’s sixth largest supplier, is also expecting an unprecedented soybean harvest — of 2.6 million tons — and is having areas with too much or too little rain as well, Eduardo Blasina, head of Blasina y Asociados agrifood consultants in Montevideo told Latin Trade. As in Argentina, soybeans are now Uruguay’s top export item, having overcome beef for the first time. Also as in Argentina, Uruguay’s farmers have other problems not attributable to Mother Nature. Lack of proper roads and railroads and the government’s sluggishness in dredging rivers, combined with high fuel-import bills, are pushing up costs and giving Uruguayan producers major headaches, Blasina said. “Ships can load up only to 70 or 80 percent capacity for lack of dredging. They don’t have these kinds of problems in the United States,” he added. David Haskel reported form Buenos Aires.

PHOTO: ©ISTOCKPHOTO.COM/ JOSÉ MANUEL FERRÃO

BY DAVID HASKEL

Latin Business Chronicle

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INDUSTRY REPORT: ENERGY

The energy world has been changed completely by the unconventional fuel revolution. Are Latin American companies ready to make the change?

Shale oil drilling in the Patagonian province of Neuquen. The region could experience an energy revolution due to forecasts indicating that it could have the third largest reservoir of unconventional natural gas in the world.

BY ÁNGELA MARÍA RIAÑO

o be successful in the energy world, you not only need to have reserves, but also know how to develop them. With the discovery of new conventional and alternative fuel reserves, countries in the Americas will be among the main players for decades to come. With the United States at the lead, followed by Canada, the question is just how ready Latin America is to accept the challenge of developing its natural riches. Five years ago, it was impossible to imagine that the United States would stop buying Venezuelan and Middle Eastern oil. The United States, as the world’s largest fuel consumer, has a global impact on the energy industry. But it was precisely five years ago that something completely unexpected happened. Seismic phenomena and human ingenuity combined to favor the United States. An earthquake revealed in shale rock previously trapped fuel deposits. These discoveries of oil and gas in places such as North Dakota and Idaho, as well as large investments in the industry, led to a revolution of epic proportions. The result has been the development of specialized technology that allows the extraction of unconventional fuels. Gas for example, is extracted through carbon deposits and from the production of shale basins. This same technology is also used to extract oil from formations known as “tight oil” and tar sands in Canada. This exploitation of unconventional sources has transformed the

LATIN TRADE MARCH-APRIL 2013

global energy scene. The United States will not only be self-sufficient by 2020, but an energy exporter as well. The unconventional fuel revolution has flipped the world’s energy statistics. Data from the United States Energy Department shows that unconventional fuel reserves in the world are distributed as follows: 30 percent in the United States, Canada and Mexico; 20 percent in the Asia-Pacific region, particularly China; 15 percent in Argentina, Brazil and Colombia; and 15 percent in South Africa and others. The more traditional big players, such as the Middle East and Venezuela — which still have the world’s largest reserves — will now have to compete against the unconventional fuel team.

CHALLENGES FOR THE NEW ENERGY SCENE Since then, the global market has stepped up demand for energy. “The world economy increasingly needs more energy in order to maintain economic growth, improve living standards and tackle poverty,” says the World Bank. “Even with improvements in energy efficiency, we are expecting global energy demand to double by 2050. This comes as an inevitable consequence of an increasing global population, economic growth, urbanization and all other related population movement and energy-dependent services,” the World Energy Council said in its January 2013 report.

PHOTO: ENRIQUE MARCARIAN/REU TERS/NEWSCOM

PLAYERS OR MERE SPECTATORS?

PHOTO: FLORIAN KOPP IMAGE BROKER/NEWSCOM

INDUSTRY REPORT: ENERGY

Oil rig of the Brazilian oil company Petrobras passing Sugarloaf Mountain, Bahia de Guanabara Bay, Rio de Janeiro, Brazil.

The Latin American energy giant today is Brazil. The country’s discoveries of crude mean that its production could more than double Venezuela’s by 2020. The council mentions two more challenges: Climate change and poverty. In the case of the former, it is crucial that we reduce greenhouse gas emissions by half in order to keep the rise in the world’s temperature by less than two degrees Celsius. For the later, one fact strikes a dissonant note —1.3 billion people in the world today live in poverty, with no access to electricity. “Something that was unimaginable 20 years ago has become reality today: Energy is at the top of the list of world governments’ priorities,” said Christopher Frei, head of the WEC. The BP Energy Outlook 2030 states that global energy demand will rise by 36 percent between 2011 and 2030, boosted by emerging economies. “Without continuous improvement to energy efficiency, demand would shoot up at a faster rate simply to keep pace with economic growth,” the report says. The BP analysis points out that supply patterns are changing, and that oil and unconventional gas are playing a larger role in satisfying global demand: “By 2030, the United States will be self-sufficient in terms of energy, while China and India will become increasingly dependent on imports.” There are three key messages this year in BP’s report. First, the power of competition and market forces will boost efficiency and innovation. These two aspects are particularly relevant “not only in

LATIN TRADE MARCH-APRIL 2013

unblocking new supply sources, such as oil and unconventional gas, but also in improving energy efficiency. As a result, the rise of carbon emissions is being curbed.” Second, technology and efficiency are key elements. BP predicts: “The development of unconventional energy resources will improve the efficiency of power generation and economical vehicle fuels.” Third, BP highlights how new resources are finding their way into the industry. The United States and Canada both stand out in energy innovation, as proven by their use of technology to extract oil and unconventional gas. The world population is expected to reach some 8.3 billion by 2030, which implies an increase in energy demand of 36 percent compared to 2011. Demand for all types of energy is expected to go up by 93 percent in countries that don’t belong to the Organization for Economic Cooperation and Development. “Outside the OECD, energy use by 2030 will be 61 percent more compared to 2011, with year-on-year growth of 2.5 percent — or 1.5 percent per capita — a figure that represents 65 percent of the world’s energy consumption, compared to the 53 percent in 2011,” the report shows. Electrical power generation will rise 49 percent by 2030 (2.1 percent year-on-year), according to BP estimates. The figure shows a global rise

INDUSTRY REPORT: ENERGY

in primary energy of 57 percent. Primary energy used directly for industrial purposes will grow 31 percent (1.4 percent year-on-year), a figure that points to a 25 percent growth in consumption. Renewable fuels, including bio-fuels, are expected to show the quickest growth rates, with an average of 7.6 percent year-on-year from 2011 to 2030. Nuclear and hydraulic energy (2.6 and 2 percent year-on-year respectively) are estimated to be the types of energy to grow the most. Lastly, in the fossil fuel category, gas will be the quickest growing, with 2 percent per year, followed by coal, 1.2 percent per year and oil, 0.8 percent per year.

RICHES OF THE AMERICAS With this as the background, the Western Hemisphere is set to become the leader in the energy industry. While the United States, Canada and Mexico are the most promising in terms of unconventional fuels, Argentina, Brazil and Colombia’s reserves are not far behind. The United States, as a world leader, will no doubt be a case to study and perhaps from which to learn. Its success lies in four factors, according to BP and the WEC. The first is its access to hundreds of drilling rigs. Secondly, it has a highly competitive industry and, as a consequence, stimulates production and investment. Thirdly, under US laws, the subsoil is property of the landowner, which makes exploration easy because it is in private hands. Lastly, and perhaps most importantly, regulation is in favor of investment. This alone can explain how the Bakken field in North Carolina matched Colombia’s production in just five years.

The non-conventional fuel revolution and the new energy order naturally meant that Latin America would have major players. Paradoxically, Venezuela has to import gasoline, despite having 17.9 percent of the world’s crude reserves. Political uncertainty and an economic crisis have restrained this energy monster from unleashing its true potential as an oil power, despite its huge reserves. It is worth highlighting that it was not even mentioned in the reports of BP or the WEC. According to Venezuelan analysts at Ecoanalítica, “We are expecting an 8 percent drop in domestic demand by 2013. This would mean that economic sectors closely linked to the oil industry would be affected by cuts to public spending and the expected changes in currency rates; as a result, sectors such as trade and transport could fall by 2.3 and 3.6 percent respectively.” The Latin American oil giant today is Brazil. Conventional oil discoveries there could double its output compared to Venezuela by 2020. According to a report issued last February by the Organization of Petroleum Exporting Countries, Brazil is one of the six countries contributing to the growth of the world’s oil supply this year, along with the United States, Canada, Sudan, Australia and Kazakhstan. Nature has blessed Brazil to such an extent that it is estimated to have even larger reserves of unconventional fuels than the United States. However, it has shown little interest in developing those resources for now and is instead concentrating on conventional crude oil discoveries. Argentina looks promising in the unconventional fuel sector, especially with shale gas reserves of about 774.5 trillion cubic feet. Not only does

INITIAL ASSESSMENT OF SHALE GAS RESOURCES IN 48 MAJOR SHALE BASINS IN 32 COUNTRIES INDICATES LARGE POTENTIALS

Source: U.S. Energy Information Administration (EIA)

MARCH-APRIL 2013 LATIN TRADE

INDUSTRY REPORT: ENERGY

Argentina have the reserves, but it is also willing to develop them. That would explain last year’s nationalization of YPF and other movements taking place, all of which led to the conclusion that the country is betting heavily on this sector to boost its economy. YPF announced investments of $37.2 billion from 2013 to 2017, mainly in search of new reserves, exploiting both conventional and unconventional fuels and improving its refineries. According to The Economist, Argentine President Cristina Fernández “found a scapegoat for the country’s problems in the form of Spain’s Repsol, which owned 75 percent of YPF. Repsol announced large deposits of shale gas in Vaca Muerta, Patagonia. However, the government accused Repsol of cashing in on the discovery rather than using the dividends for exploration and development”. In May of last year, the government nationalized 51 percent of YPF. However, The Economist suggests that YPF’s nationalization has not had the desired effect the government was expecting. “In the third quarter of 2012, YPF’s oil output hardly grew at all, while its natural gas production dropped 2 percent and profits fell by 3 percent, compared to the same period in 2011 (when the company was affected by strikes).”

Shale Gas Reserves (Trillion cubic feet)

France Poland Brazil Algeria Libya Canada Australia South Africa Mexico Argentina US China Others

180 187 226 231 290 388 396 485 681 774 862 1,275 647

Source: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, EIA, April 5, 2011

Consequently, energy costs are expected to shoot up by more than 70 percent. The Argentine economy’s hopes rely on the Vaca Muerta discovery and such recently opened projects as El Trébol. Meanwhile, Colombia, one of the five countries chosen by the WEC for its 2013 analysis and report, is moving forward in its exploration and has been one of the main investment centers. For the WEC, Colombia’s critical agenda for energy stems from reviewing subsidies and taking advantage of the country’s vast hydroelectric potential. The biggest challenge is in terms of regulations that would allow the development of more energy sources. From the point of view of hydrocarbons, Colombia reached crude production of 1 million barrels per day. This milestone “meant a 3 percent increase compared to the year before,” said Alejando Martínez, president of the Colombian Oil Association.

LATIN TRADE MARCH-APRIL 2013

In addition, the country attracted new foreign direct investment in oil. “In September 2012, it reached $4.35 billion, and was expected to reach $5.8 billion by December in the same year, a 14 percent increase compared to 2011. These figures represent 37 percent of the total foreign direct investment in Colombia for 2012,” said Martínez. Expectations in Colombia’s new reserves, in terms of opportunities for growth and sustainability, are running high, according to the hydrocarbon industry’s union. The expectations are focused on the “exploration of heavy crudes, offshore activities and unconventional deposits. The challenge is to stay above the one million barrel per day mark and raise the ratio of reserves to production in 2013,” Martínez stated. Colombia, however, is the exception. Uncertainty seems to be the common factor among all the Latin American countries. The Panorama Petrolero website says: “The relationship between economic policy and hydrocarbon development in a country or region is always close.” Clear rules, stable regulations and favorable political conditions for investment are some of the challenges the region is facing.” Since last year, the WEC has been reminding us that energy prices, unconventional hydrocarbons and large-scale development of hydroelectric projects should be among the top priorities for Latin America. But it seems not. A worrying sign is that, while all the reports early each year from international energy organizations focus on analyzing perspectives and challenges for the following decades, the Latin American Energy Organization’s January bulletin is about gender equality in the industry across the region. Ángela María Riaño reported from Washington, D.C.

PHOTO: ARCHIVO CEET/EL TIEMPO DE COLOMBIA/NEWSCOM

Country

Oil rigs in Colombia. The country will expand its production based on the exploitation of heavy crudes.

TOURISM

THE

SEDUCERS As the tourism business continues to grow throughout the region, countries are competing ﬁercely to lure investors with ﬁscal incentives and guarantees

hether in the fascinating and varied landscapes of any of Costa Rica’s 28 national parks, or in the monumental architecture in Cartagena de Indias, Colombia, both countries — like many others in the region — are certain of one thing: they want to exploit their natural landscapes and create policies that will increase foreign investment in tourism. Governments know there is a lot of money at stake. Grupo Iberoestar for instance, the Spanish firm that has invested the most in Latin America, has already signed cheques for more than $1.5 billion. Similarly, Grupo Pinedo invested $1.1

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billion. Yet governments and business leaders want more. It’s now all about seducing investors. The battle for dollars has begun. Allan Flores, Costa Rica’s tourism minister, was paying close attention to the representatives of the world’s leading hotel chains during a conference involving Latin American tourism ministers and businesspeople, Cimet 2013, in Madrid. Flores said what the representatives wanted to hear: “We offer attractive fiscal incentives that would benefit investors.” Flores explained that hotels could benefit from a discount of between 25 and 30 percent, while agencies could reap discounts of up to 95 percent.

Safety is another factor to keep in mind. Flores is well aware of this, and to motivate investment towards his country, he emphasized that Costa Rica was ranked the safest country in Latin America by Latin Business Chronicle for 2011. El Salvador’s tourism minister, José Napoleón Duarte, boasted about his country’s tourism growth. “We increased our available number of hotel rooms by 15 percent, while international tourist arrivals increased 6 percent over the last year.” He also pointed to the major infrastructure projects currently underway in El Salvador, particularly in airports. All has been reinforced by the tour-

ILLUSTRATION: ©ISTOCKPHOTO/ DRMAKKOY

BY SERGIO MANAUT

TOURISM

It’s now all about seducing investors. The battle for dollars has begun.

ism law reform, which has given new tourism investments a breathing space of five more years, from December 2010, to be considered as “tourism projects in the national interest” that qualify for fiscal incentives. Moreover, the amount required to benefit from the reform was brought down from $50,000 to $25,000 in an effort to attract smaller companies. One of the outstanding benefits is the exemption from income tax for up to 10 years, counting from the moment a company launches operations. Another benefit is a 50 percent discount on municipal taxes for five years. The investment laws also ensure freedom of transferring funds abroad.

STATE POLICY Last year, Guatemala declared tourism a state policy, given its role as the country’s number one industry. The vice-minister of tourism, Maruja Acevedo, pointed out that repatriation of profits is a competitive bonus in Guatemala’s fiscal system. Irrespective of which political party is in power in Guatemala, the nation’s tourism strategy is one of sustainability, said the tourism minister, Nelly Karina Jerez. “We are totally open to business,” she said. “All land that belongs to the government can be considered as suitable for investment.” Jerez went a step further in her pitch by explaining the fiscal incentives for new projects, such as a sevenyear income tax exemption and 12 years in the case of hotels. Nicaragua’s tourism minister, Mario Salinas, followed the same steps as his counterparts and highlighted the “power-

ful incentives” his country offers to investors. The foreign investment promotion law eliminates restrictions on the way foreign capital enters the country. The law also allows free currency conversion and withdrawal of capital. The tourism industry law for its part establishes the fiscal incentive framework. Once a project is approved through the foreign investment promotion council, the benefits are awarded for 10 years, which can be extended to a further 10 in case of reinvestment. The long list of benefits includes many fiscal write-offs and discounts. For instance, up to 90 percent exemption of income tax and 100 percent in case of participating in the Paradores de Nicaragua project. It also includes exemption from real estate and sales taxes, applicable to services such as design, engineering and construction.

WHAT CUBA NEEDS TO DO Over the last 20 years, international tourism to Cuba has grown at an average of 7.3 percent every year in hotel occupancy, and some 11 percent in the number of arrivals. In fact, since 2001, more than 34 million people have visited Cuba, of which 2.8 million arrived in 2012 alone. Despite these figures, which make Cuba the third most visited country in the Caribbean, the government has lots to do in terms of attracting investment. However, the country’s tourism minister, Xiomara Martínez, showed she was aware of what is needed: “Foreign investment is well protected under a law that guarantees a transparent legal system,” she

said. Martínez added that Cuba has some good fiscal benefits and also guarantees the repatriation of earnings. With these guarantees, the Cuban authorities are looking to promote foreign investment to develop hotels and golf courses. In keeping with those policies, the Cuban government needs to develop a political argument that can gain the trust of the United States. In a conversation with Latin Trade, Martínez acknowledged that the US embargo on the island does affect tourism development. “We have a natural market which is the United States, and that could boost tourism by up to 50 percent, but they don’t come, and we’ve got used to living without them,” she added. Today, the world has turned its attention to the successful growth of Colombia’s economy, which translates to an increase in foreign investment. This investment has never been far from the tourism sector. According to FDI Market estimates, during the first six months of each year from 2007 to 2011, Colombia received some $815 million in hotels alone. The foreign trade bank of Colombia, Bancoldex, designed a credit initiative that would finance investments and increase the added value of tourism services. But the benefits are not just for investors and companies. Anybody who wants to pack their suitcases, lay in the sun and enjoy some margaritas on the beach can feel the benefits. How? Services offered in travel packages in hotels or local travel agencies are exempt from sales tax. What next? Sergio Manaut reported fromMadrid.

MARCH-APRIL 2013 LATIN TRADE

INVESTOR: DONALD TRUMP

Trump Ocean Club Panama Below: Patio

PHOTO: ANA BERGER; COURTESY OF AMGW AGENCY/TRUMP HOTEL COLLECTION

Donald Trump, CEO of the Trump Organization.

SEEING OPPORTUNITIES Donald Trump is expanding his brand in Latin America. BY JOSEPH A. MANN, JR.

onald Trump, the billionaire U.S. real estate developer, television personality and onetime presidential hopeful, has had a presence in Latin America for several years and now is expanding his brand in the region. Attracted by strong growth, political stability, burgeoning upper classes and a well-heeled business class in the region, the Trump Organization has already put its name on a luxury resort in Panama (Trump Ocean Club), the Trump International Golf Club and Residences in Puerto Rico and a residential and beach resort in the Dominican Republic. The New York City-based group has also announced plans for a massive residential and commercial complex in a rundown port neighborhood in Rio de Janeiro and a high-end apartment tower in Punta del Este. Trump is even moving the brand into the luxury retail market. The organization recently partnered with Brazil’s Supermarcas to license the Donald J. Trump Signature Collection men’s apparel, eyewear, watches and leather accessories in Brazil as part of an international expansion plan. In addition, Mexico’s P&L Global Network was named licensing agent for the signature collection and Trump Home, a line of home furnishings, for Mexico and “select countries” in South America, Central

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America and the Caribbean, the Trump group said. Working with its subsidiaries, Trump Hotel Collection and Trump International Realty, the Trump group is looking at other possible investments in selected countries. “We’re already in Latin America … we just opened the tallest building in the region at our resort in Panama,” Donald Trump, the chairman and president of the Trump Organization, told Latin Trade during a recent visit to Miami. “Several countries there are doing very well,” he added. Trump, who was travelling with his sons Eric and Donald Jr., came to Miami to promote an investment of more than $200 million in upgrading the Doral Golf Resort & Spa which the Trump Hotel Collection purchased last year for around $150 million. The Doral was originally developed in 1962 and Trump’s plan is to revamp the hotel, clubhouse, spa and five golf courses to “the greatest resort anywhere in the country,” Trump said. “We love to be in Miami,” noted Trump, who arrived at the Doral in his helicopter. “This is a point of entry for people from all over Latin America.” Key to the strategy of the organization and its Trump Hotel Col-

INVESTOR: DONALD TRUMP

PHOTO: ©CECIFOTO.COM

The Trump Organization is looking at other opportunities in Argentina, Colombia, Costa Rica and some parts of Mexico.

urban infrastructure, including public lighting, natural gas lines, sewers and a fiber optic network. Participating in the project along with Trump are MRP International, Brazilian construction firm Even, Caixa Economica Federal and the Salamanca hedge fund, according to reports. No figure was provided for the total cost of the project. Trump International Realty announced in late 2012 that it was starting to sell units in the Trump Tower Punta del Este, a 23-story luxury residential apartment building with apartments ranging from $700,000 to $2.5 million. This is the first South American project for Trump’s international realty division. Partnering with Trump are two Argentine construction companies, YY Development Group and Dujovne-Hirsch Associates, an architectural firm. In Puerto Rico, the Trump International Golf Club & Residences covers about 1,000 acres on the Atlantic Ocean. It offers high-end residences, a clubhouse, two golf courses, a beach club, restaurants and other amenities. In some cases, Trump makes investments in projects, while in others, his group licenses his name to top-end properties and charges a fee. Not all Trump’s efforts in the region have turned out the way he planned. In 2007, Trump signed a partnership with Cap Cana, S.A. to develop a luxury resort in the Dominican Republic. Trump Farallón Estates at Cap Cana includes 68 luxury residences (costing $3 million to $12 million each) in a gated community, one part of an enormous, longterm development on 8,000 acres in Cap Cana. Five years later, Trump’s attorneys sued Cap Cana and its owners for about $5.8 million, according to media reports. The suit alleges that the developers stopped sending monthly sales report to Trump Marks Real Estate and owes millions in licensing fees for use of Trump’s name on the resort. Writing about the legal action, the New York Post poked fun at Trump, referring to his famous line, “You’re fired,” from his TV series “The Apprentice,” saying: “Donald Trump has a message for a bunch of developers in the Dominican Republic: ‘You’re sued.’” Joseph A. Mann reported from Miami

lection, launched in 2007, is finding the best locations in U.S. and international markets and building top-end luxury hotels, resorts, golf courses and spas. Location is critical for any successful project, he noted, pointing to the approximately 800-acre Doral complex he acquired in Miami as an example: “This is a prime location that can never again be assembled,” Trump said. Speaking to visitors at the Doral, he added: “Some people have a knack for getting the right location. I think it’s instinct. Why do some people putt well?” Speaking with Latin Trade in Miami, Eric Trump, executive vice president of development and acquisition for the Trump Organization, said that the Panama resort is doing extremely well and that they are looking at other opportunities in Argentina, Colombia, Costa Rica and some parts of Mexico. Asked if the Trump group has a minimum rate of return for its properties in Latin America, Eric said: “We’re a family-owned company. We don’t have to operate to appease shareholders. We did 14 projects in 2012 and we can be very selective ... we could do one or 14.” Latin America, he added, clearly offers some interesting opportunities. While the Trump group is evaluating investment and licensing possibilities throughout the region, its presence in Latin America currently includes properties and ongoing projects in Panama, Brazil, UruDonald Trump in a guay, the Dominican Republic and Puerto Rico. presentation of his new The most spectacular Trump property in Latin America is project in Miami, the the Trump Ocean Club International Hotel & Tower Panama Doral Golf Resort & Spa. on the Punta Pacifica Peninsula. This complex includes a sailshaped, 70-story building with 369 rooms and suites, floorto-ceiling windows and five outdoor pools. Opened in 2011, the hotel is the tallest building in Latin America. Bloomberg reported that the developer of the complex, Newland International Properties, was carrying out “friendly discussions” with bondholders after defaulting on $220 million debt issued to build the hotel and apartment complex. Shaping up to be another major project is a business and residential complex in Rio de Janeiro that will have five towers, each one 38 stories, and major infrastructure improvements to support the project. Trump Towers Rio is part of a move to revitalize the rundown port area being carried out before the 2016 Olympic Games. The project will involve the construction of pedestrian tunnels and bicycle paths as well as the rehabilitation of 700 kilometers of

MARCH-APRIL 2013 LATIN TRADE

SPECIAL REPORT: FRANCHISING

THINK GLOBAL, ACT LOCAL

Latin America, long an importer of franchises, is now exporting them too. Successful brands are spreading their footprint as franchises transcend national frontiers.

“A

bsolutely…” is the unequivocal response that Lucas Secades gave Latin Trade when asked whether Latin America has stopped importing franchises and now exports them. Secades is executive director of the Argentine association of brands and franchises. With responses ranging from caution to militant optimism, spokesmen for franchises all over the world are talking passionately about this issue. “The first ones to go abroad were the Americans. They started to establish themselves in various countries through the concept of franchising,” said Secades. This happened during the 1990s, although there had been a few pioneering examples in the region like McDonald’s. A few years later local entrepreneurs with innovative and successful businesses in their own countries started to look upon

LATIN TRADE MARCH-APRIL 2013

franchises as the way to cross borders. And so it was that the Latin American brands started to venture into little-known territories, abandoning the protective limits of their own markets. “The (franchising) sector is showing relative maturity in some countries, where some brands are already exporting or are in the process of starting to export,” said Diego Elizarrarás Certa, president of the Mexican franchise association. “It often happens that franchising starts with the arrival of foreign brands. Then the leading national brands start to copy the model. Over the years, it ends up being a small business phenomenon. At that point most of the franchises are national, and that’s where some of the already consolidated brands and original concepts start to be exported to other countries.” In effect, the three countries with the most

highly developed franchise sector in Latin America – Brazil, Mexico and Argentina – have adopted this way of doing business and have a very high percentage of national franchises in their markets, according to numbers provided by the Ibero-American franchising federation, Fiaf, whose headquarters are in Valencia, Spain. It’s 95, 90 and 84 percent in Brazil, Argentina and Mexico, respectively. This success also encourages companies and entrepreneurs to expand to other countries by marketing their own brand as a franchise.

TYPICAL EXAMPLES There are lots of examples of franchise export success stories. The traditional manufacturer of shortbread biscuits, Havanna, an Argentine classic, has moved into upscale cafés that

PHOTO: COURTESY OF HAVANNA

BY ÉLIDA BUSTOS

PHOTO: COURTESY OF FISK

SPECIAL REPORT: FRANCHISING

offer chocolates, sweets (alfajores) and the biscuits, all packaged through a masterful job of marketing and branding. Today, Havanna has 75 points of sale outside of Argentina, with a franchising presence in almost all of Latin America, the United States, Israel and Spain. There are 200 cafés in Argentina, some owned and some franchised. Another case in point, with double merit, is Pronto Wash, a mobile car wash. The company was established in December 2001, at a time when the Argentine economy was falling apart, resulting in hundreds of corporate bankruptcies and millions of unemployed. Twelve years later Pronto Wash has 400 franchises in 30 countries on four continents, and by its own reckoning, it’s the Latin American company with the highest growth in the franchise sector worldwide. The concept on which the company developed is to offer the car wash service while the customer is doing something else. For that reason the best locations are the parking lots of shopping centers or cinemas. The second innovative concept it offers is a low level of water consumption: less than 1.3 gallons per car. Thus, the smart-looking black and yellow carts have earned a place in the world, offering six basic services and four extras. In Brazil’s enormous marketplace there are many successful cases to choose from. The Fisk Institute – Brazilian in spite of its name – offers courses in English, Spanish, Portuguese and computer literacy overseas and is accumulating prizes in excellence. It started developing its own method of teaching English through the experience in Brazil of its founder Richard Fisk and today its franchises go far beyond the region: it can be found in North America, Asia and even Africa. There are 59 learning centers in Argentina and 11 in Japan. In all there are 863 units, 108 of them outside the country. O Boticário is another success story among Brazilian franchises. Its presence abroad is limi-

ted to eight countries, but within those eight there are 368 points of sale and 59 exclusive stores. The company presents itself as “the best network of perfume and cosmetics franchises in the world” and was one of the first in Brazil to adopt the franchise system. Even in its own country O Boticário’s numbers are impressive: it has more than 950 franchises and 3,353 points of sale in Brazil. Localiza is another Brazilian export star. It has the biggest network of car rentals in Latin America, with franchises in the principal cities of Argentina, Bolivia, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay in addition to the ones it has in Brazil. In all, it has a presence in 352 cities with 513 agencies, 49 of them abroad.

MEXICO Mexico shares the podium with Brazil and Argentina as one of the big franchise markets. For anyone who doesn’t believe Latin Americans are creative, Kidzania is a shining example. It’s a theme park for children from four to 12 years of age, “where they pretend to be adults” in a city scaled down to the size of children. Kidzania was launched in Mexico in 1996 by businessman Xavier López Ancona and claims to be “the education entertainment leader for children.” It currently has franchises in Japan, Indonesia, Portugal, the Arab Emirates, South Korea, Malaysia, Saudi Arabia, Thailand, Kuwait, Russia, Egypt, India and Turkey, as well as in Brazil and Chile in Latin America. The next exclusive licenses, expected to start operations in 2014, will be in Singapore, Moscow and Manila, with parks opening in London and the United States in 2015. Nor is medicine excluded from the world of franchises. There are examples in providing medicine (such as GI Farmacias and Farmacias de Ahorro, with a large local following

but little international exposure), as well as in medical services. The Umbilical Cord Bank is a Mexican biotechnology company whose business is cryopreservation of stem cells from the umbilical cord. It has only been in business for about 10 years but has 25 franchised branches, some of them in Argentina, Brazil, Colombia and the United States, and a presence in 70 cities. It is the first privately owned bank of its kind in Latin America. The franchise offers to store stem cells from the umbilical cords of newly born babies, a technique that’s considered the most advanced for the effective treatment of serious illnesses that a person might suffer throughout his or her lifetime, such as leukemia, anemia, cerebral palsy or tumors.

PERU The emerging Peruvian economy is not being left behind on this Latin American franchise trend. From being a country with 65 percent of foreign brands in its franchises, it recently started to export its own through gastronomy. “Peru has the number two gastronomy in the world after France,” says Carlos Canudas, an accountant, specialist in franchises and a big gastronomy fan. “But it’s not fast food gastronomy,” he adds. These are high-level restaurants, like Astrid y Gastón, Osaka or the Rosa Náutica, which have increased the value of Peruvian cuisine in the world of international gastronomy.

EXPORTING FRANCHISES SUCCESSFULLY In Argentina, according to data from the

MARCH-APRIL 2013 LATIN TRADE

Canudas Study, 54 per cent of the brands that export their franchises are in clothing, followed by services and gastronomy. “When you’ve saturated your own country you start to expand abroad,” says Canudas. And it’s natural to take the first steps in neighboring countries. “Everyone wants to set up in the United States, so they can say, ‘I am in the United States.’ But setting up there involves 22 different pieces

LATIN TRADE MARCH-APRIL 2013

of legislation, depending on which State you’re in. It’s very complicated,” he said. Speaking from the northern extremity of the region, Elizarrarás Cerda, of the Mexican Franchise Association, agrees. “The United States is on the minds of many brands as the ideal destination, if you set aside the complicated legal structure and the competition in the market,” he said. But Latin American offers a similarity of markets, as well as the language and the legal and commercial structures, factors that become more attractive when a franchise seeks to expand into other countries.

However, not all Latin American countries are the same. They differ widely in terms of tastes and sizes. “In Bolivia, Chile and Peru, however, tastes are similar,” says Canudas. “And so, it’s very probable that a Peruvian brand, for example, will have its first foreign experience in Chile.” Canudas explains that Argentine clothing franchises have had to “tropicalize” colors (more conservative hues are preferred in Argentina), and modify the range of sizes. Latin American tourists go to Buenos Aires searching for design, he adds. Then, “instead of us going out to foreign markets, they came to us to buy.” By now, the main Argentine apparel brands have reached stores in Paraguay and Uruguay. “In Paraguay’s Pinedo mall, 51 out of the 150 brands they carry are from Argentina,” he says. The experts insist that the crucial point of a successful franchise is having a concept, product or service that stands out from the others. And the product or process cannot fail to include packaging, marketing and brand development. A brand of lingerie is a good example.

PHOTO: COURTESY OF LOCALIZA

SPECIAL REPORT: FRANCHISING

“A signature like Caro Cuore won’t sell more underwear. You sell 100% sensuousness. Enter the store and there is perfume in the air. The music 80% is special. Whatever you see, whatever you hear, 60% whatever you touch is special. It’s a concept,” 40% says Canudas. And later, the buyer takes home 20% the clothing in a big, bright bundle. It’s all marketing, something in 0% which Argentines excel. “It’s a question of perception. You feel good enough to wear Caro Cuore clothes.”

BRAND ORIGINS

Argentina

KEYS TO SUCCESS Secades, of the Argentine association of franchises, cites four basic characteristics for a franchise to be successful in foreign countries.

Brazil

Colombia

Ecuador

Foreign

Spain

Guatemala

• Be a solid company • Have a professional organization at the local level • Have a different product or service • Make sure this differentiation is attractive in other markets

Mexico

Peru

Portugal

Domestic

Uruguay

Venezuela

The phrase “Think globally, act locally” sums it up. Experts agree on the importance of government support in the promotion and export of franchises. In this respect, Secades and Canudas emphasize the support given by the authorities

MARCH-APRIL 2013 LATIN TRADE

in Mexico, Brazil and even Venezuela to the sector, though not in Argentina. Amid the enthusiasm over franchises, warning voices can be heard. Rafael Giménez Camacho, a Mexican specialist, says he is concerned about regulation in the region, or its absence in some cases, and how this can result in abuses. “Without regulation, any company can franchise itself. It doesn’t matter whether they have experience, have a track record, or how much capital they have,” he says. “Most of the legal problems arise because some of the franchises represent businesses that have little in the way of a proven track record.” Some countries have implemented special legislation and others are planning to do so. Meanwhile, governments are putting their full weight behind promotion of the sector. That support is reflected in Brazil and Mexico by the gigantic international trade shows

organized there each year. The Mexican show – in March – is the most important in the Spanish-speaking world. The Brazilian one – in Sao Paulo in June – is the most important in the world. And, as a sign of the times, from May 26 to June 14 the First Virtual Trade Show of Latin

American Franchises will take place. This feverish activity is backed up by the sector’s growth figures. As Canudas points out, Latin America’s economy is growing at 3.6 percent a year, but the franchises are growing faster than 10 percent, and 20 per cent in Peru. Elida Bustos reported from Buenos Aires

PHOTO: COURTESY OF O’ BOTICARIO

SPECIAL REPORT: FRANCHISING

2. Surround yourself with people better than you. Your corporate management team will serve as the backbone for all business decisions and strategic initiatives during the course of developing your franchise. Build a team comprised of experienced industry executives that excel in varying areas of expertise, including ﬁnance, operations, marketing, among others. These individuals are the ones who will continue to instill the discipline and unwavering focus necessary to succeed.

How to Build a Successful Franchise in Latin America Woods Staton, chairman and CEO of Arcos Dorados, operator and grantor of McDonald’s franchises throughout Latin America and the Caribbean, offers the following tips on how to successfully build a franchise in Latin America while staying true to the brand’s core objectives: 1. Develop a highly-focused business strategy. A well-defined strategy that offers sustainable growth and value-creation opportunities are key elements to business success. Help drive top-line growth through innovative product offerings, targeted marketing strategies and an aggressive, yet realistic, growth schedule for your franchise. Moreover, aim to capture bottomline profitability through a consistent focus on cost containment and a healthy debt profile, among other aspects.

LATIN TRADE MARCH-APRIL 2013

operators for your franchise as they will be reﬂecting your brand and upholding your commitment to quality. A franchisee with close ties with the community represents a good opportunity for your franchise based on their knowledge of local economic conditions and consumer preferences. Most importantly, maintain close connections with your franchisees in order to build a strong network of individuals who are highly-committed and interested in the development and long-term health of your business.

4. Provide highly-structured training programs. Whether it be corporate or franchise employees, a highly-structure training program is key in driving personal and professional growth within your system. Create well-rounded employees through demonstrations on business best practices, including people management, sales, marketing and accounting, while also emphasizing consistent, high-quality operations, procedures and service. Additionally, provide professional goal setting and evaluation programs designed to clearly outline the steps necessary for employees to reach success. Through continuous training programs, the skills learned will transfer into providing customers a better overall experience.

PHOTO: COURTESY OF ARCOS DORADOS

3. Choose committed franchisees. Strive to ﬁnd the strongest

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SPECIAL REPORT: WOMEN

WOMEN ON BOARD Participation of women in corporate boardrooms is very low in Latin America, though the experts maintain that a better gender balance at the top offers substantial advantages for companies.

s Iceland staged its tenacious recovery from the 2008-2011 of its economic debacle, women were pulling many of the bootstraps. Women who played key roles in big corporations were key to the recovery but so too were those who hauled small businesses out of the mire. Halla Tomasdottir, president of the Icelandic investment bank Audur Capital, one of the companies that weathered the crisis without negative consequences, said in a TED talk that a balance between men and women results in more balanced corporate decision-making. In fact, several studies have shown that companies tend to perform better, make better decisions and understand their markets more thoroughly if they have an even balance between men and women on their management teams. A recent study by Nick Wilson, professor at the Leeds University business school in England, found that having at least one woman on the board of directors of a company reduces by 20 percent the chance that it will go bankrupt. But if this is so, why do so few women have posts in company boards? In developed markets the proportion of women on boards of directors is growing, but they remain a minority. María Gabriela Castro, Andes region director for the executive search company Korn/Ferry International, says that in her firm’s most recent study for

LATIN TRADE MARCH-APRIL 2013

the United States — the Market Cap 100 — the participation of women increased from 16 percent in 2009 to 19 percent in 2011. Meanwhile, the percentage of women on boards of directors of the Fortune 500 companies reached 15.7 per cent according to a study by Catalyst, a non-profit organization that encourages participation of women in business. Women make up only 12.5 per cent of the boards of directors of the companies that comprise the FTSE 100 in the United Kingdom. At the current rate of increase, it would take 70 years to achieve equality of the sexes on boards in that country, according to Women on Boards, a study by the British government. The same percentage is repeated among the 200 largest companies of the Australian ASX, according to the Australian Institute of Company Directors. In the European Union, 12 per cent of board members are women, according to research from Russell Reynolds and the European Professional Women’s Network.

LATIN AMERICA FOLLOWS SUIT The situation is no better in Latin America. For example, according to the Women on Boards Report, a publication of Governance Metrics International, just 6.8 per cent of the board members in a sample of 23 Mexican companies were women. This percentage, consistent with the re-

sults from a Catalyst study, is higher than in other parts of Latin America. Lauren E. Smith, director of the Miami office of Diversified Search, an executive search company, says: “Latin America is a long way behind the rest of the world in appointing women to boards of directors. According to studies by Catalyst, the percentage of women on boards in Brazil is 5.1 percent and just 1.9 percent in Chile.” Colombia, though progressive in regional terms, also has a long way to go before it reaches gender equality on boards of directors. A study circulated on the portal La Silla Vacía (The Empty Chair) shows that of more than 500 board members of the country’s 50 largest firms, women comprise barely 10 per cent, and there are none at all in almost half of them. On the other hand, Marjorie Kean, also a director of the Miami office of Diversified Search, comments that one reason this happens is that “most of the large Latin American companies were originally family businesses. The members of their boards of directors are usually members of the family or friends of the family. For example, the board of directors of Femsa has three women, all of them with the Garza surname. Some of the companies in which one would expect to find women, like Natura, don’t have any. Puerto de Liverpool has one woman on its board but she’s not an independent member. Grupo Modelo

BY ÁLVARO MORENO

SPECIAL REPORT: WOMEN

LaƟn America is a long way behind the rest of the world in appoinƟng women to boards of directors. Lauren E. Smith, Director of the Miami ofﬁce of Diversiﬁed Search

Most of the large LaƟn American companies were originally family businesses. The members of their boards of directors are usually members of the family or friends of the family.

PHOTOS: L.SMITH & M.KEAN: COURTESTY OF DIVERSIFIED SEARCH; M.CASTRO BY GORT PRODUCTIONS

Marjorie Kean, Director of the Miami ofﬁce of Diversiﬁed Search

has three women on its board, one from InBev and another one from the company. Bimbo just has one.” Fortunately, changes appear to be on the way. According to “Women on the board of directors”, a study by Deloitte, “both the public sector and the private sector in various parts of the world are studying the possibility of having voluntary policies and even legal requirements, including set quotas, aligned with the best practices codes of corporate governance of each country to improve the gender balance on the boards.”

LOOKING FOR FEMININE TALENT Executive search firms are another group that has noticed these changes. Karin Brandes, a partner of CTPartners, says that currently there is a marked tendency to accept women on boards of directors. “It’s not so much that they are looking for women but rather that they accept the notion of including more women,” she says. Although she notes that Latin America is still very reluctant to elevate women to directorships, she says that “when they give you a search to do, they ask for the best talent available without explaining whether they want a man or a woman, because what they need is someone who will complement the board strategically.” Brandes has also noticed that many of the companies that want to include women on their boards are doing it to add diversity.

This characteristic, she says, is more marked in the retail sector and the banks. “In these sectors, when they look for board members, they often say the ideal would be a woman for reasons of diversity, to incorporate someone who understands the consumer.” María Gabriela Castro says the market is looking for the best human capital independent of gender. “When we look for a board member, we look for candidates who have the specified skill set, as adjusted to the profile and the challenges the organization faces. Women and men are competing today in an atmosphere where gender is less and less important, since the skills, education and management styles are independent of whether it’s a woman or a man. The final decision of choosing one or another is based on the proven achievements of their management in other companies or boards of directors and the value they can add to the organization.” Nevertheless, adds Castro: “To the extent in which women are gaining ground and recognition, the organizations will place increasing value on female executives as an extremely valuable asset in terms of talent on their boards of directors.” Eduardo Rabassa, Managing Partner of the executive search firm Amrop, notes that today Latin American companies are more interested in bringing women onto their boards of directors, since “to the extent that women have become more

When we look for a board member, we look for candidates who have the specified skill set, as adjusted to the profile and the challenges the organizaƟon faces. María Gabriela Castro, Director Andean Region of Korn/Ferry International

involved in the working world and moved up in terms of responsibility, their roles and perspectives are increasingly more fundamental to decision-making in boardrooms because they bring balance and vision. Latin American is starting to take steps in the right direction.” The benefits of having women on the boards of directors are many and varied. The Deloitte study sums them up as strengthening the concept of diversity in organization; a better understanding of a marketplace in which the decision-makers are increasingly women; a different way of thinking at all levels of the organization; and the development of a more open culture at all levels. Pondering the differences between men and women with respect to risk and its consequences in the financial crisis, Xavier Sala-i-Martín, professor of Economics at Columbia University, asked himself a few months ago: “Why did the bankers and investors all over the world take those big risks? Many analysts have commented that they did it because, implicitly or explicitly, the state had assured them that it would never let them fail (as appeared to be the case in the end). But what if that wasn’t the reason? And what if the most basic cause was that the financial sector is dominated by men — and not by women — with too much testosterone?” Álvaro Moreno reported from Miami.

MARCH-APRIL 2013 LATIN TRADE

COUNTRY REPORT: CHILE

President Sebastián Piñera (second from the left) headed the launch of the program “Chile a developed nation.”

Will the country make the grade by 2020, as President Piñera hopes, or will it become stuck in the dreaded middle-income trap? BY GIDEON LONG

ebastián Piñera, the Chilean president, made a lot of bold promises during his election campaign in 2009, but perhaps the most eye-catching was his pledge to set Chile on course to becoming a developed country by the end of this decade. It sparked a debate about what exactly that means, and what Chile needs to do to join the club. Will the country make the grade by 2020, as Piñera hopes, or will it become stuck in what some economists refer to as the dreaded “middle-income trap”? It is a debate that is key to understanding the country’s business climate at the moment. Chile is in transition. In many ways, it is no longer a developing country: it is the only South American member of the OECD and its per capita income,

LATIN TRADE MARCH-APRIL 2013

adjusted for purchasing power parity, is around $19,000, in line with those of Croatia, Russia and Poland. Along with Uruguay, it is the least corrupt nation in Latin America and beat France, Austria and Ireland in Transparency International’s most recent corruption perceptions index. It is one of the easiest countries in Latin America in which to do business. And yet, when it comes to education, vocational training and research and development, Chile still lags behind its OECD peers. It spends only 0.7 percent of its product on research and develeopment compared to an OECD average of around 2.5 percent. It has the highest level of income inequality in the organization, with a Gini coefficient of more than 50 percent,

and although poverty has fallen sharply since the return to democracy in 1990, around 15 percent of the population still lives below the poverty line. To compound these shortfalls, Chile is the only major country in Latin America without significant fossil fuel reserves, and the prospect of an energy crisis hangs over economic growth prospects like a Sword of Damocles. As the country evolves, so do its citizens. Chileans demand far more from their politicians and business leaders these days, and are more willing to take to the streets to voice their discontent. In the past, a reasonable degree of stability and prosperity were enough to keep people happy, but not now. Chileans want

PHOTO: COURTESY GOVERNMENT OF CHILE/ JOSÉ MANUEL DE LA MAZA

EDGING TOWARDS DEVELOPED STATUS

COUNTRY REPORT: CHILE

social justice, political reform, better health care and fairer education. They are increasingly concerned about the environment and sustainable development. In short, Chile is starting to face rich nations’ problems. Piñera is all too aware of this. The student-led protests of the past two years have helped keep his approval ratings mired below 35 percent. He acknowledges that transforming Chile into a developed nation will not be easy. “Do you know how many countries have managed to pass from underdevelopment to development in the past 50 years?” he asked a recent meeting of foreign correspondents in Santiago. “You can count them on the fingers of one hand. There are very few that have achieved it – South Korea, Singapore. Many have never tried and others that have tried get to an intermediate zone and there they stay, stuck.”

THE YEAR OF INNOVATION In order to prevent that happening to Chile, Piñera has focused on what he knows best: business. An entrepreneur to the core of his soul, he has made efforts to cut red tape. “When we came into government in 2010 it took an average of 27 days to set up a company in Chile,” says Cristián Larroulet, Piñera’s secretary-general. “We cut that to seven days and have just passed another law that will cut it again, to just one day. That will put us on a par with New Zealand as the fastest country in the world in which to set up a company.” Piñera declared 2012 “the year of entrepreneurship” and 2013 “the year of innovation”. In a bid to prove that these are more than just slogans, his government has increased tax breaks to companies that invest in research and development, an area where Chile has a lamentable record. Ac-

cording to the OECD, Chilean companies invested the equivalent of 0.16 percent of the economy in research and development between 2008 and 2011, the lowest level in the 34-nation organization. The OECD average was 1.28 percent. The government says its measures are beginning to bear fruit. The number of new companies formed in Chile last year rose to 68,000 from 58,400 in 2011. The target this year is 80,000. The Piñera administration is continuing to fund Start-up Chile, a scheme that lures foreign entrepreneurs to Chile with the promise of $40,000 in seed capital with no strings attached, a one-year work visa and free office space. Launched in 2010, the scheme has been a success, inspiring similar programs elsewhere in the world. It is funded through Corfo, the government’s economic development agency. Corfo’s corporate manager, Matías Acevedo, says the

Per capita income is around $19,000, in line with Croatia, Russia and Poland

A container ship at the port of Valparaiso, one of the most important in Latin America.

MARCH-APRIL 2013 LATIN TRADE

COUNTRY REPORT: CHILE

As Chile’s ﬂag ﬂies overhead, pedestrians stroll through Constitution Plaza near “La Moneda” (Presidential Palace) in downtown Santiago, Chile.

challenge has been to change the mentality of Chileans, who have a reputation in the region for being efficient and hard-working but rather staid and risk-averse. “Chile always scores well in any measure of the strength of its institutions, but traditionally we’ve not been so good when it comes to innovation and entrepreneurship,” Acevedo said. “Ten or 15 years ago, entrepreneurship was frowned upon in Chile. It was for people who’d done poorly at school. Young Chileans aspired to jobs in big companies rather than working for themselves. But that’s changing.” These cultural shifts will take years to take root. So will the government’s plans to overhaul vocational training, eradicate extreme poverty, tackle gender inequality, improve the country’s much-criticized education system and reduce income inequality, all of which are essential if Chile is to become a developed nation. But Osvaldo Larrañaga, an economist at the United Nations Development Program, says the country is at least confronting

LATIN TRADE MARCH-APRIL 2013

these issues. “If you take education, for example, it’s now very much an issue in the public domain,” he says. “But it’s clear we have a lot of work to do.” The long, slow slog towards developed nation status is likely to inform the Chilean political and economic debate for the rest of this decade. In the short term, however, Chile is enjoying the good times.

UNINTERRUPTED GROWTH For much of 2012, economists in Chile were braced for a slowdown as the world economy continued to flounder. But the slowdown never happened. Month after month, Chile produced remarkable economic results. The economy expanded by around 5.6 percent last year, making the it one of the fastest growing in the world. In Latin America, only Peru and Panama posted stronger growth rates, according to the United Nations, which forecasts an expansion of 4.8 percent this year, comfortably ahead of the regional average of 3.8 percent. Unemployment fell to just 6.4 percent by the end of last year and in the Santiago area, home to more than a third of the population, it hit its lowest level since the days of Salvador Allende’s public works schemes in the early 1970s. Much of the country is operating at full employment and indeed the problem is not a scarcity of work, but a shortage of skilled labor.

Foreign direct investment is going through the roof. It hit a record $28.2 billion last year, a 63 percent increase from 2011. That means that Chile now receives 18 percent of all foreign direct investment in Latin America — more than Argentina, Colombia and even Mexico, with a population seven times the size of Chile’s. Brazil is now the only country in the region that receives more FDI. While mining still receives the lion’s share of such investment, big foreign money is also being ploughed into energy projects, service industries, telecoms and transport. With the economy booming, one might expect inflation to be a worry, but at just 1.5 percent last year, it was well below the regional average. And with wages rising by 4.7 percent in real terms during 2012, Chileans are undeniably richer than they were before. And yet, despite this slew of good news, economists see some dark clouds on the horizon. Economic growth might be high, but consumer and public spending are higher still, points out Alejandro Fernández, economist at Gemines Consultores in Santiago. He sees a worrying “decoupling between internal demand and production” and believes the current economic boom is unsustainable. Like many economists (let alone exporters) he is concerned by the strong Chilean peso, which appreciated by 8.5 percent against the dollar last year and has continued to strengthen in 2013. “In many ways this has all the classic elements of a party: a very strong currency that is stimulating consumer spending, plus low employment and high wages,” Fernández said. “The only thing to suggest the party might not end badly is that levels of indebtedness in Chile are still relatively low.” Despite the efforts of successive gov-

PHOTO: ROB CRANDALL STOCK CONNECTION WORLDWIDE/NEWSCOM

Chile now receives 18 percent of all foreign direct investment in Latin America — more than Mexico, with a population seven times larger.

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COUNTRY REPORT: CHILE

ernments to diversify the economy, Chile remains highly dependent on copper exports, which account for over half of export revenue. As long as the price of copper remains high due to strong Asian demand, Chile will prosper. But if China falters, Chile will too. “Chile is often held up as a successful example of export-led development but if you look at things with a more critical eye you see that our export structure hasn’t changed much in 30 years,” Fernández said. “It’s still very much weighted towards commodities or production with little added value. As such, we remain vulnerable to international price volatility.”

LOOKING ABROAD One way in which Chilean companies have sought to grow is by venturing abroad. In a country of fewer than 17 million people, many of the biggest Chilean firms have simply outgrown their domestic market. That is particularly true of the country’s four leading retailers, Falabella, Cencosud, Ripley and La Polar, and its two big forestry companies, CMPC and Arauco. Some of the most interesting Chilean business ventures are happening not in Chile but elsewhere in the region. The forestry companies have bought up thousands of hectares of land in Uruguay and Brazil to complement their vast pine

LATIN TRADE MARCH-APRIL 2013

Trucks at Los Bronces copper mine, some 40 miles northeast of Santiago and 11,500 feet above sea level.

and eucalyptus plantations in southern Chile. CMPC is expanding its wood pulp plant in the Brazilian city of Guaíba at a cost of $2 billion, while in Uruguay, Arauco is soon to inaugurate its Montes del Plata plant, a joint venture with Scandinavia’s Stora Enso. The four retailers, which in Chile account for a third of retail sales, are making inroads into the Colombian and Peruvian markets, having already established a presence in Argentina. In Peru, Chilean firms now account for 9 percent of retail sales while in Colombia, the figure is more than 4 percent. Falabella and Cencosud have long-standing investments in Argentina, where they account for 6 percent of sales. For Falabella, Peru now brings in 20 percent of company revenue, with Colombia adding 7 percent and Argentina 6 percent. Ripley is planning to open at least 10 new stores in Colombia between now and 2015, while La Polar says it will open two or three stores in Colombia this year. Parque Arauco, a Chilean company that operates shopping malls, is due to open a mall in the Colombian city of Bucaramanga shortly and expand its MegaPlaza mall in Lima. By the end of 2011, Chilean companies had invested $52.5 billion in countries across Latin America. Most of it was invested in Argentina and Brazil, but Peru

and Colombia are catching up quickly. Mexico is also likely to grow as a destination for Chilean investment in the years to come, thanks in part to the formation last year of the Pacific Alliance, a trade bloc grouping Chile, Colombia, Mexico and Peru. With a population of over 2 billion and accounting for over a third of Latin American GDP, the bloc has its eyes set firmly on trade with Asia. But the four founder members are also discussing greater integration among themselves, which is likely to result in further Chilean investment in the other three member nations.

ENERGY AND MINING Back on home soil, the problems of becoming a developing country are all too evident in the mining and energy sectors. Gone are the days when companies could come to Chile and build mines or smoke-belching coal-fired generating plants with only a cursory regard for the environment or local communities. These days, Chileans are more assertive of their rights, more concerned about the environment and more likely to protest against plans with which they disagree. The most notable example is the longrunning battle over HidroAysén, a huge hydro-electric scheme that would involve the construction of five dams on two pristine rivers in Patagonia. The scheme

PHOTO: IVAN ALVARADO/REU TERS/NEWSCOM

Mexico is also likely to grow as a destination for Chilean investment in years to come, thanks to the formation of the Paciﬁc Alliance.

COUNTRY REPORT: CHILE

would be the biggest energy project in Chile’s history, with an installed capacity of 2,750 megawatts — 16 percent of the country’s current generating capacity. But it would mean flooding 5,900 hectares of land and the construction of an enormous transmission line to carry electricity from Patagonia to central and northern Chile. Environmentalists say the scheme is madness and have waged a successful campaign to raise awareness of its potential impact. Last year, Colbún, one of the two companies behind HidroAysén, effectively put it on hold by saying it would not seek approval for the construction of the transmission line until it received further assurances from the government. In the best-case scenario, the project will only be up and running in late 2023. HidroAysén is not the only project that has run into problems. In August of last year, Chile’s Supreme Court rejected the planned $5 billion Central Castilla ther-

moelectric power plant in northern Chile on environmental grounds. Castilla, a joint venture between Brazil’s MPX Energia and Germany’s E.ON, was the second biggest energy project in the country, behind HidroAysén, and would have added a further 2,100 megawatts to the grid. It has been definitively scrapped. In light of these and other delays and adverse court decisions, Chile’s business community says it is too difficult to get approval for energy projects. Mining companies have warned that if Chile does not build more power plants soon, the country’s copper mines could face power shortages. The government concedes there has been an increase in the number of cases that have gone to court, but says this is simply because the state is taking the concerns of its citizens more seriously. “In itself, judicialization is not a bad thing,” says Ricardo Irarrázabal, an undersecretary at the environment ministry.

“The fact that someone can go to a court to lodge a complaint is positive.” He also points out that in the vast majority of cases where companies present either an environmental impact study or a declaration of environmental impact, the projects are approved without problems. Of the 980 such cases in Chile in 2012, only 10 ended up in court. Nevertheless, data from the ministry shows that since 2001, 31.5 percent of energy projects and 13.4 percent of mining projects proposed in Chile have faced some sort of legal objection. In response to industry complaints, the government launched Chile’s first environmental court in January to deal specifically with such cases. Two more courts, one in the northern city of Antofagasta (close to many of the copper mines) and one in the southern city of Valdivia (close to several hydroelectric schemes), will start work in June. Some mining companies have cited the

MARCH-APRIL 2013 LATIN TRADE

COUNTRY REPORT: CHILE

PHOTO: PR NEWSWIRE/NEWSCOM

100 MW Solar Facility to be built in Chile by SunEdison for CAP Mining.

Since 2001, 31.5 percent of energy projects and 13.4 percent of mining proposed in Chile have faced some sort of legal objection.

LATIN TRADE MARCH-APRIL 2013

But it will be years before that happens. At present, non-conventional renewables account for only 4 percent of Chilean electricity generation, although the state has pledged to increase this to 10 percent by 2024. In the absence of feasible sources of renewable energy, the state continues to rely on coal-fired and hydro-electric power. The energy ministry says three coal-fired plants and six hydro-electric plants are under construction, with a combined installed capacity of 2,100 megawatts, or 12 percent of current capacity. That, he says, will guarantee that the lights stay on for now. The irony, of course, of Piñera’s pledge to turn Chile into a developed country by 2020 is that he is unlikely to be in power when the decade ends. His four-year term ends next March and he cannot seek immediate reelection, although he could stand in the presidential elections of 2018. His immediate successor will be chosen on November 17 this year, with a second round (if needed) on December 15. The front-runner is the Socialist Michele Bachelet, who ran Chile from 2006 to 2010. From within Piñera’s own centreright coalition, the two candidates are Laurence Golborne, who shot to fame as the mining minister tasked with saving the 33 miners trapped in the Atacama

Desert in 2010, and a former defense minister, Andrés Allamand. Whoever wins, Chile is unlikely to stray far from the free market model that has served its economy so well for decades. It will remain one of the most attractive countries in the region for foreign investors, one of the most open to the rest of the world in terms of trade and one of the most politically stable. Whether and when it adds “developed nation” status to that list of accolades is another matter. Gideon Long reported from Santiago de Chile.

Front-runner in the Chilean Presidential race, Michele Bachelet

PHOTO: ANDY RAIN/EPA/NEWSCOM

high cost of energy in Chile as a factor in their decisions to postpone major projects. State-owned Codelco has shelved the expansion of its Salvador mine in the Atacama Desert along with further investment in Inca del Oro, a gold and copper project it owns with Australia’s PanAust. Antofagasta Minerals halted its Antucoya mining project in northern Chile last year, blaming rising costs, while Canada’s Barrick Gold has pushed back the start date for production at its giant Pascua Lama gold mine on the border between Chile and Argentina. The companies say they need cheaper and more reliable sources of energy. Mining consumes around a third of all the electricity generated in Chile and according to the national mining society, Sonami, energy now accounts for 20 percent of mine production costs, up from 11 percent a decade ago. One potential solution lies in nonconventional renewable energy. Chile has tremendous potential for solar, wind, geo-thermal and tidal generation. As Piñera put it at his recent breakfast with foreign correspondents: “We are poor in the energy sources of the past, in fossil fuels, but rich in the energy sources of the future.” If Chile could tap the sun that beats down on the Atacama Desert each day, it could solve the mining industry’s energy problems for good.

SPECIAL REPORT: SOCIAL RESPONSIBILITY

Oedc and the United Nations, and to their own agreements at the regional level, especially in Europe. In addition, execution is subject to the increasing scrutiny of multilateral money-lending agencies and credit rating institutions.

CSR, HAVE WE LEARNED ANYTHING? The practices of social corporate responsibility in the region are moving toward an integrated model of sustainability and viability. What corporations should do, and what they should not do, to design successful programs. BY DAVID RAMÍREZ

lthough corporate social responsibility (CSR) still continues to be tied to philanthropy, a recent assessment by Latin Trade suggests that regional CSR practices are oriented increasingly toward an integrated model of sustainability and viability. These practices are aimed not just for the companies themselves, but also for the communities and regions where they do business, according to academics and executives consulted in the assessment. The application of this broad concept has emerged not only through the imitation of practices in developed countries and imported by multinationals, but also because there is a greater entrepreneurial and social awareness on the importance and meaning of CSR. However, those consulted agreed that there is still much to do, mainly in terms of spreading current knowledge, coordinating efforts and measuring results.

FROM THEORY ... Academics and business people agree that the concept of CSR is tied to the achievement of corporate objectives, i.e., establishing good practices in economic, environmental, labor and human rights situations. Taken together, a common definition of CSR is one that covers all

LATIN TRADE MARCH-APRIL 2013

those issues pertinent for responsible business. According to Luis Ulla, executive director of the Argentine Institute of Corporate Social Responsibility, CSR in the region is changing the attitudes of large corporations. They are not only adopting the new concepts of sustainability, but also forcing their suppliers, and in many cases their customers, to do the same. Ulla argues that the trend is partly a response to state regulations which are ever more demanding (for example, with respect to environmental stewardship), and also to the growing interest of consumers in acquiring goods and services provided by socially responsible companies. Such is the level of awareness of the relevance of CSR that at Cemex the issue permeates the entire value chain, from the chief executive to the shop-floor worker. As Daniel Suárez, vice president of corporate relations of Cemex-Colombia, says: “CSR is ingrained in the DNA of the company.” Orencio Vásquez, coordinator of the Spain-based Observatory of Corporate Social Responsibility, maintains that execution of the most comprehensive CSR policies arises equally from the need to adhere to the governing principles of the

Multilateral entities are not simply demanding more CSR policies, but assisting in the financing of new practices. Estrella Peinado-Vara, senior specialist at the Multilateral Investment Fund of the Inter-American Development Bank, explains that her group assures the compling with three basic criteria before granting financing to projects with a CSR impact: first, that they be environmentallycompatible; second, that they promote equality of income linked to the base of the pyramid; and third, that positively impact labor conditions. As an example, Peinado-Vara mentions the regional initiative for comprehensive recycling that the agency is co-financing in five countries and today is benefiting the base of the industry’s social pyramid. The industry is comprised of small recycling companies that involve some 4 million people in the region. The project has the support of private enterprise as well as local governments and communities. The IDB’s fund is also supporting projects in Central America aimed at improving labor conditions in the sugar mills of Guatemala and El Salvador. In general, the most successful cases with the most CSR impact are ones that integrate the largest number of people in the community in the companies’ operational areas of influence. In the case of Colombia, Margarita Salazar, assistant director of sustainable development for EPM, the municipal utilities of Medellín, notes that the company’s policy is based on productive chains and takes full account of its basis in the community. Salazar highlights the work of sustainability and viability of the company on two fronts. On one hand, the company is providing universal services, facilitating the minimum consumption of electricity and water in the poorest communities, whether it be through prepaid cards or establishing consumption caps. On the other hand, EPM works in programs in which the community

... TO PRACTICE

PHOTO: JULIO CESAR HERRERA/EL TIEMPO./EL TIEMPO DE COLOMBIA/NEWSCOM

SPECIAL REPORT: SOCIAL RESPONSIBILITY

itself trains and, working as a contractor of EPM, installs the water and energy meters that the company uses. In addition, EPM promotes a project with its suppliers, who face difficulties from linieros, the go-betweens in charge of the installation and extension of electricity lines. In this program, the company trains people from special interest groups who later contract with the suppliers. The training provided by the company ends with the delivery of a certificate that also is recognized by the Sena, the government office of labor training and learning. In some cases the certified linieros have joined together to provide their services to third parties. In Colombia, too, Cemex has several CSR programs in place, oriented to compensate for the housing shortage in the poorest areas. One of them delivers materials in order to build, extend or improve the homes. They also provide training on how to do it. In another high-impact Cemex project, the company trains the communities in the manufacture of concrete blocks for construction of houses. The blocks may be used to build their homes or they can be sold, so that the resulting resources may be recycled into similar programs. Cemex also contracts technical staff from the regions in which it does business to provide engineering or architectural services for the company. Because of the impact of its operations on the environment, the mining industry’s policies of sustainability are a constant focus of attention by authorities, academics and the general public. Chile is in the vanguard not only of the industry but also of the concept of CSR in the sector. One especially interesting perspective

is that of Grupo Antofagasta Minerals, which manages some of the country’s largest mines of copper and other metals. Rafael Quiroga, manager of external affairs and previously general manager of Acción CSR, the main non-governmental organization of this type in Chile, confirms that the Chilean vision of CSR has generally evolved from the philanthropic to the sustainable and viable. The companies themselves operate and develop the projects. While Antofagasta is said to be the leader in the use of environmentally friendly techniques for the use of water and energy, the company is implementing its CSR programs throughout the value chain of its operations. In general it seeks to benefit the suppliers, customers and communities, but it is also tackling the integration of women into the labor force. The company has proposed to increase the quota of

The highest impact is attained by businesses that get more cooperation from other companies, government and the communities themselves. women in its direct operations to more than 10 percent of the total number of employees. This represents a proportion of more than double the industry average.

FUTURE CHALLENGES Experts and entrepreneurs agree that Brazil is the region’s leader in terms of high-impact

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Alfreda Rosales built her house in the La Paz municipality on the outskirts of Mexico City with a Cemex CSR program.

There needs to be improved communication among companies, governments and communities. There are good initiatives such as Rio Sustentável and Creo Antofagasta. CSR practices. The Ethos institute is recognized as a pioneer on issues of sustainability and viability. In addition, Brazil has moved further into the vanguard with the Novo Mercado initiative, which is similar to the Dow Jones Sustainability Index in the United States. Latin Trade spoke with a prominent executive of a multinational with operations in Brazil about the main challenges and obstacles that must be overcome to implement CSR. One of these challenges is to improve the suitability of many NGOs because they have a poor operational structure and make inefficient use of the resources received for developing projects. Similarly, the executive noted that while there is a growing awareness in the importance of the issue of corporate sustainability and viability, some companies still invest in projects that have nothing to do with their main business. They only do so to take advantage of financial or reputational incentives, or simply because they feel obligated to do so if, for example, the law orders the relocation of houses in the face of construction of some megaproject. From this perspective, a primary exercise by the companies would be to undertake CSR practices that are directly related to their main business. The Brazilian executive added that the other major challenge to achieving the highest impact is increased cooperation among businesses. Many companies currently adopt isolated programs to the benefit of just one community, missing out on synergies. The big chal-

LATIN TRADE MARCH-APRIL 2013

lenge in this becomes choosing who will coordinate the actions of the different companies. The catalyst will probably come in the form of government action or independent companies such as consulting firms or NGOs that already have the required infrastructure. However, in addition to company-to-company dialog, there needs to be improved communication among companies, governments and communities, for example in coordinating the development plans for local and regional development. These kinds of collective initiatives have barely begun. Among those that should be highlighted is Rio Sustentável, which involves more than a dozen influential Brazilian companies in the city of Rio de Janeiro. Another is “Creo Antofagasta,” which was planned to benefit the sub-region of the same name in Chile. Quiroga notes that the Antofagasa initiative, as well as the nascent cooperation among companies to coordinate, for example, the dates on which they hold cultural programs in the mining regions, is a clear example of the advantages of and the need for listening to all the stakeholders, instead of making CSR decisions from behind desks. Quiroga adds that another challenge that must be overcome is the elimination of fiscal obstacles to CSR investments. Chile has already done so, but the principle could be extended to other countries. In Chile these initiatives are considered to be expenses unrelated to business. That squares with the overall vision of the theme as a concept and in practice.

PHOTO: KEITH DANNEMILLER/ZUMA PRESS/NEWSCOM

SPECIAL REPORT: SOCIAL RESPONSIBILITY

Peinado-Vara says that the government’s role in promoting CSR should be broad. It needs to construct the framework within which companies can do business. For Suárez, the issue is not standards, but rather what the companies can achieve on their own, knowing that the issue is crucial to their very survival. Ulla thinks it is difficult for a government to punish or reward the behavior of companies if the State itself does not follow responsible and measurable practices in sustainability and viability. Most of those consulted by Latin Trade mentioned another key challenge — the need to publicize the scope of high-impact CSR programs. They add that they are not talking about corporate secrets, but policies of common benefit. Certainly, for Vásquez the important issue is not to publicize what has been achieved, but how. Ulla invites companies to spend less in communication campaigns publicizing what they are doing in CSR, but to share with their peers what they have learned throughout the process. In addition, experts add that their efforts to inform people about CSR issues must be far-reaching enough that they can resist times of companies’ financial weakness or cycles of economic recession during which companies might choose to cut back their publicity programs. Although there are initiatives to establish common management indicators, most of those interviewed agree on the need to define acceptable parameters for the measurement and verification of the achievements reported by companies in terms of CSR.

For the Brazilian executive, who preferred to speak on condition of anonymity, it is not only about proving the achievements, because what is lacking is an evaluation among shareholders and beneficiaries, if in reality the former agree to implement them and the latter to acknowledge the value of their scope. Vásquez insists strongly on verifying the achievements, though taking into account that there are barriers that make access to information difficult or do not permit outsiders to verify the truth. Vásquez also emphasizes as a recent milestone in terms of measurement the existence of the ISO 26000 Standard, which clarifies the contents of CSR policies, although he underlines that this is not yet a certifiable standard, which limits its scope. Finally, another challenge no less important is that of how to face the competition of businesses that come from countries such as China, which make products based on CSR practices different from those of Europe and the Americas, primarily in terms of labor rights. On this issue, Vásquez recalls that the first forum of human rights and the corporation, held in Geneva last December, emphasized the importance of taking into account human rights, not only for labor but also for economic, social and cultural issues. The important issue important received the attention of an audience of 900 from 85 countries. Are new changes about to emerge? David Ramírez reported from Miami.

MARCH-APRIL 2013 LATIN TRADE

OPPORTUNITIES ABOUND, INSIDE AND OUT

A LATIN TRADE SPECIAL SUPPLEMENT

“Peru’s thriving economy and ever expanding investment opportunities, coupled with companies’ financial strength and hunger for growth, are significantly bolstering local M&A and private equity activity.” OMAR GOYENECHEA, Managing Partner of Equitas Partners

ver the past 10 years, Peruvian company Ransa has been busy setting up shop in a handful of countries throughout Latin America. And it doesn’t plan on slowing down anytime soon. In fact, Ransa—one of the region’s largest logistics companies with presence in Peru, Guatemala, El Salvador, Honduras, Ecuador and Bolivia—has already zoomed in on its next target. “We are looking for an investment opportunity in Colombia, which is an extremely appealing market for us given its size and dynamic economy,” notes Emilio Fantozzi Temple, CEO of Ransa, the main logistics operator of the powerful Romero Group that provides services to mining, energy, industrial and retail sectors. “In 2014 we will look to expand into other countries like Chile and those in the southern triangle of Central America, which includes Nicaragua, Costa Rica and Panama.” “Our objective,” adds Fantozzi, “is for Ransa to have a presence along the ‘South Pacific Corridor’ from Guatemala all the way to Chile.” This aggressive growth strategy is one that is being replicated in many companies throughout Peru, particularly those that already have solidified their presence locally and therefore are looking cross border to expand. “While we do see more and more [Peruvian] groups looking to be-

LATIN TRADE MARCH-APRIL 2013

come regional players, such regional vision is mostly prevalent in some large groups with vast financial resources and limited local growth potential of a significant scale,” notes Omar Goyenechea, Managing Partner of Equitas Partners, a Lima-based M&A and private equity advisory boutique. “At the larger end of the spectrum, Peru’s thriving economy and ever expanding investment opportunities, coupled with companies’ financial strength and hunger for growth, are significantly bolstering local M&A and private equity activity, creating a virtual growth circle that will eventually lead the more successful companies into tapping the other markets in the region.” This is certainly the case of Banco de Crédito del Perú (BCP), the country’s largest bank. Last year, BCP—which already had a presence in Bolivia—bought a controlling stake in Chilean brokerage IM Trust and in Colombia’s Correval in order to create a regional investment bank. “We want to serve clients that do business not only in Peru, but that are looking beyond our borders to Colombia and Chile and vice-versa,” says Christian Laub, head of BCP’s regional investment bank division. “The same thing is happening with Chilean and Colombian companies.

For this [to become possible], we needed to develop regional capabilities to accompany these companies and provide solutions according to their needs.” BCP will provide Investment Banking, Securities Brokerage and Asset Management on a regional scale, thus taking advantage of the synergies through the integration of the Peru, Chile and Colombia stock markets on the Integrated Latin American Market (MILA). The Bank also has plans to open up representative offices in Colombia and Chile later this year. “In the past few years the economies of Colombia, Peru and Chile have had positive growth rates, open market policies and similar overall economic development models,” adds Laub. “This has resulted in companies in each of these countries wanting to expand to the others. Something similar is occurring among developed countries, which are no longer viewing each of these three countries individually but rather as a macro-region within South America.” Indeed, foreign and local investors continue to place their bets on not only these three South American countries, but on the region as a whole, as many of the world’s economies continue to struggle with stagnant and even slumping economies.

A LATIN TRADE SPECIAL SUPPLEMENT

While some companies in Peru are looking abroad to expand, others continue with a country-centric approach by increasing their presence in Peru’s largely underserved provincial cities—and tapping customers in the country’s much talked about burgeoning middle class.

LOCAL MOVES

hile many companies in Peru are leveraging their high profitability (largely fueled by the country’s positive macroeconomic figures) to expand their operations abroad, others continue with a countrycentric approach by increasing their presence in Peru’s largely underserved provincial cities—and tapping customers in the country’s much talked about burgeoning middle class. This is a strategy that makes sense, according to Arnaldo Aguirre at Lima-based consulting company Arellano Marketing, who notes that Peru’s emerging middle class has increased by 64% in the past eight years (since 2004). “This is relevant to the country’s business sector because an important mass of people are being incorporated into the country’s overall consumer market; people with modern consumption habits, which is to say that they are open to new things and new technologies,” Aguirre notes. “Their incomes have improved, resulting in a greater purchasing power. The fact that 64% of Peruvians declare themselves middle class, that they feel middle class, is more important than the actual percentage.” While the purchasing power of this growing middle class is clearly creating business opportunities for many sectors across Peru’s economy, this is particularly true for sectors tied to the country’s booming internal demand such as the retail, construction and financial sectors.

BANKING

“We plan to grow alongside the country.”

subsidiary CrediScotia Financiera. “We plan to grow alongside the country by providing better services to all segments and sectors of Peru’s expanding economy, including both individuals and companies,” says Hubert De La Feld, Chief Operating Officer of Scotiabank Perú, the country’s third largest bank. “We intend to increase our presence in provinces, which have shown great economic dynamism lately. Through our various channels, we aim to improve the country’s financial inclusion by providing more individuals and micro businesses access to the financial system.” This year Scotiabank will focus, among other things, on growing CrediScotia and developing new sales channels such as mobile banking,

any financial companies in Peru are reaching out to the lower segments of the country’s population, where just a few years ago many didn’t have access to credit or formal banking. Many of the country’s top banks and financial institutions are channeling resources to their microfinance operations in order to expand their business—and thus benefit from the country’s low penetration of financial services. Scotiabank, Banco de Crédito and BBVA Continental are just some of the banks that are increasing microfinance and personal loans amid the country’s consumer boom. Scotiabank Perú, a unit of Canadian lender Scotiabank, for example, bought Peru’s Banco del Trabajo in 2008 to form its consumer and small business finance

LATIN TRADE MARCH-APRIL 2013

HUBERT DE LA FELD, Scotiabank Perú

HUBERT DE LA FELD Chief Operating Ofﬁcer Scotiabank Perú

leaning on the legal framework recently established by Peru’s Congress, through its approval of a bill to regulate mobile banking transactions in the country.

A LATIN TRADE SPECIAL SUPPLEMENT

Peruvian companies should continue to grow, inside and outside Peru’s borders. Banco Falabella, a subsidiary of Chile’s largest retailer Falabella, is another financial institution that is channeling resources to solidify its presence in the local market by tapping Peru’s large cash-only segment of society. Indeed, financial market penetration in Peru is still relatively low as compared to that of other countries in the region. Earlier this year, Banco Falabella—which main business is personal loans—launched three new products (direct deposit accounts, debit cards and online banking) for a total investment of $20 million. “We aim to serve our clients through an integrated portfolio of financial services,” says Felipe Venturo, Manager of the Bank’s Marketing and Development division. “For many years going, we have offered a broad selection of deposits and debt products that are characterized for being simple, transparent and convenient.” The bank—which entered the Peruvian market in 1997 as a consumer finance lender and in 2007 as a bank— today has over 1.2 million account holders of which 250,000 do not have accounts in other banks. The bank, which offers savings accounts, salary accounts, credit cards, a network of

LATIN TRADE MARCH-APRIL 2013

ATMs and other services to its clients, has a leading 17% market share in credit cards in the local market. The bank, which also has operations in Argentina, Colombia and Chile, began an aggressive expansion plan in Peru a few years ago and today has a presence in seven of the country’s main cities including Lima. While companies’ local growth and investment strategies shows that there is money to be made in Peru, investors increasing appetite for Peruvian paper, namely corporate debt, over the past few years is a clear indicator that Peru’s risk perception has, and continues, to improve. This is best exemplified in a recent bond offering by Scotiabank Perú, which placed a $400 million bond late last year. The 15-year subordinated bond—which was used to improve the bank’s capital structure—had a recordlow 4.5% coupon. “Peru’s economic growth and political stability, especially at a time of global uncertainty, was a key factor for the success of the placement, as was the solidity of the overall Peruvian banking system, which was already well known to most analysts because of the international placements of our main local

competitors,” notes De La Feld. Last year, BBVA Continental sold $500 million in bonds—up from a planned $400 million—in an effort to increase personal and microfinance loans. The largest corporate bond issues last year, however, were that of Southern Copper Corp. and Volcan Compañia Minera, which sold $1.5 billion and $600 million in bonds, respectively. And investors expect these mega debt offerings—which are primarily issued abroad as they have access to better pricing—to continue well into this year and even next. Peruvian lender Banco Interamericano de Finanzas (BanBif), for example, has already announced its plans to sell as much as $400 million in bonds this year in order to expand its microfinance operations. With increased access to financing, either through major international bond issues or microfinance loans, and investor’s positive economic outlook for the country this year, it is very likely that Peruvian companies will continue to grow—inside and outside Peru’s borders. As Scotiabank’s de la Feld points out, “A slowdown in business is not possible in a country where GDP growth is forecasted at 6%.”

A LATIN TRADE SPECIAL SUPPLEMENT The Universidad de Lima

PERU’S UNIVERSITIES STEP UP TO THE PLATE ESAN’s students and staff is further promoted through cooperative agreements with universities and schools from all over the world that include faculty and student exchanges, cooperative research work and memberships with international academic networks. The Universidad de Lima is another local university that is spearheading efforts

to these areas by continually developing and improving our specialized degrees.” Innovation and leadership are two key elements that the university aims to incorporate into its programs—and instill into its graduates, according to Quiroga. “We want our students and graduates to constantly search for creative, out-of-thebox solutions in order to change their environment and generate more value,” he explains. “We want to develop students’ management skills: their strategic vision, conflict management, and decisionDemand for talent in Peru is growing more rapidly than its supply. making abilities. What’s the point in having an idea if you do not know how to improve its academic offerings in order to carry it out?” curious thing is happening in to keep up with the market’s demand for With this in mind, UPC—which offers Peru. While many professionwell-qualified talent. The University, which masters and doctorate degrees as well as als and recent graduates in the last year celebrated its 50-year anniversary, specialized diplomas—aims to recruit top world’s top economies struggle to land, offers Master’s degrees in Corporate Law, academics, particularly those with real life, and in some cases keep, management Tax and Fiscal Policy, Government Purhands-on experience. positions at major firms, corporate dechasing Management, Corporate ComIndustry experts agree that while Peru’s mand for talent in Peru is growing more munications, among others. It has also economy continues to grow, higher edurapidly than its supply. invested heavily in its infrastructure facilities cation institution in the country must step This situation, note industry observers, over the past few years. up to the plate as companies continue to is motivating higher learning institutions Meanwhile, the Universidad Peruana search for well-qualified executives—and to update their curriculums, invest in fade Ciencias Aplicadas (UPC) is also graduate students. cilities, and recruit top staff, among other channeling efforts to boost its under“Peru’s postgraduate schools have a things, in order to increase the volume and graduate and graduate programs. UPC’s fundamental role in providing high qualquality of their graduates. postgraduate school for example, offers a ity human capital who can participate in Such is the case of ESAN University, wide gamut of sector-specific and functhe development of the country,” UPC’s home to one of the country’s top business tion-specific master’s degrees including Quiroga concludes. schools. The institution, which offers Masthose related to the fields of corporate ter’s in Business Administration (MBAs), finance, logistics, construction, mining, Master’s of Science, and Executive Eduinformation technology, health, food and cation, has been a market leader in develnutrition, sports, real estate and more. oping specialized degrees ever since its “Many companies have a need for spefoundation 50 years ago. cialized technicians in certain areas of their In addition to the more traditional tibusiness,” explains Guillermo Quiroga, tles, the University offers sector-specific Director UPC’s Postgraduate School. “We degrees, particularly in industries that are aim to provide high-quality human capital fueling the country’s exceptional economic growth. These include ManageThe Universidad Peruana ment degrees in agribusiness, energy, de Ciencias Aplicadas (UPC) health services, and real estate. “ESAN is known for the excellence of its programs, which are supported by a staff of highly experienced national and international teachers with extensive academic GUILLERMO QUIROGA and corporate experience,” notes Jorge Director, Postgraduate School Talavera, Dean of ESAN. UPC The so-called internationalization of

LATIN TRADE MARCH-APRIL 2013

A LATIN TRADE SPECIAL SUPPLEMENT

Hilton Lima Miraﬂores

MAKING ROOM FOR CONFERENCES

hile Peru is increasingly viewed by international travelers as a premier tourist destination with world-class hotel accommodations and services, it’s also being viewed as something else as of late: a top destination for hosting major international corporate and government events and conferences. “In the past, event organizers would pass on Lima,” notes Paul Ingebretsen,

Lima is competing as a destination for major events. general manager of the Westin Lima Hotel and Convention Center, home to the largest convention center in Lima. “Today, we constantly have people knocking on our doors. More and more, Lima is competing with Santiago, Buenos Aires and even São Paulo as a destination to host major events.” A little less than a decade ago, travelers coming to Lima on business would have difficulty securing a room at one of the city’s top hotels if a major event was going on in the city. This shortage of hotel rooms, coupled with limited venues for hosting events of 800-plus attendees, were just some of the motives keeping event coordinators away, note local industry experts.

LATIN TRADE MARCH-APRIL 2013

However, the spate of hotel openings in Lima over the past few years— most of which cater to the corporate traveler— are not only increasing room offerings in the city, but also adding significant meeting space to the market. Such is the case of the five-star $130-million Westin hotel (South America’s first), which added 301 guest rooms as well as 17 meeting rooms and over 2,500 square meters of function space to the city. Meanwhile, the recently inaugurated Hilton Lima Miraflores—Hilton Worldwide’s first managed property in Peru and the brand’s first Hilton Hotels & Resorts hotel in the country—brings to the city 207 rooms and close to 1,000 square meters of meeting space. Other hotels that have helped increase Lima’s corporate travel offerings over the past few years include the business-oriented Casa Andina Select and the Ibis Larco Miraflores. This is in addition to the already well-established Swissôtel Lima, Crowne Plaza Lima, Country Club Lima Hotel, and the JW Marriott Hotel Lima. “Recent investments in travel-related infrastructure is helping lay the groundwork for establishing Lima as an important destination for international travelers and major corporate events,” notes Alfonso Casabonne, director of Limabased production company Estudio

Casabonne, which organizes high-end events. “The country’s amazing food, hospitable people, and stable weather are also a huge plus.” Indeed, conference organizers are increasingly eyeing Lima as a destination for major international events as noted by the high-profile events the city has hosted over the past few years—and that plans to host this year and next. These include the Annual Assembly of Felaban (the Latin American Banking Federation) last year and the World Economic Forum on Latin America in April of this year. The 2015 Annual Meetings of the World Bank Group and the International Monetary Fund are also set to take place in Lima. These events are good news for local travel operators and event coordinators as they bring to the city an influx of international high-end visitors—visitors who can experience first hand, and even help promote, the assets of this Andean city. Peru’s location in the region and the fact that Lima is a hub for major airlines are just a few of the competitive advantages valued by event organizers, according to Casabonne. “And despite the level of sophistication in event organization and services, it still is not as expensive as São Paulo or other cities in the region,” he adds. If the demand for rooms and conference space at the city’s major hotels is any indication of Lima’s popularity on the regional event circuit, then the country is on the right track. “Occupancy has been at 60% since we opened three months ago, during the summer, the slowest months of the year,” says Laura Castagnini, general manager of the Hilton Lima Miraflores. “Our meeting rooms are reserved almost every day till the end of May.” A similar situation is happening at the Westin, where the demand for conference and meeting rooms has exceeded projections by 25%. And with Peru’s economy expected to grow 6% this year, the stream of corporate—and leisure—visitors to Lima shouldn’t subside any time soon. And neither should the streams of revenues into the country’s major hotels.

LT CFO MIAMI Carlos Estefan, Regional Director of Finance/ITLatin America and the Caribbean, Starbucks Coffee Company

Gustavo Reis, Senior International Economist, Bank of America Merrill Lynch

Jose Garcia Moreno, CFO, Pepsico Beverage

SIGNS OF RECOVERY Housing and consumer spending should push US growth to 2 percent this year. Mexico to outshine Brazil as Latin America is expected to hit 4 percent. by 4 percent and Brazil 3 percent. China’s economy should expand by 8 percent this year, up from 7.8 percent in 2012. Gustavo Reis, senior international economist at Bank of America Merrill Lynch, said that medium-term projections show global economic growth returning. Currently it stands at about 3 to 3.5 percent annually, compared to about 5 percent in the past. For the United States, the bank is currently projecting annual GDP growth of 1.5 percent this year and 2.6 in 2014; for China, 8.1 percent this year and 7.7 percent in 2014. Europe is expected to grow by a negative 0.5 percent this year and a positive 0.8 percent in 2104, while emerging markets should grow by 5.3 percent this year and 5.7 percent in 2014. Joseph Mann reported from Miami.

Rodrigo Llop, Business Development Director, SAS; Ana Díaz, Director, Treasury Sales Manager, Head of Latin America, International Subsidiary Banking, Bank of America Merrill Lynch; Laura Maydón, Senior Business Leader, Commercial Solutions LAC, Visa Inc.; Rogelio Flores, Finance Director, SAS Latin America North

PHOTOS: PABLO BLÁZQUEZ

he US economy continues to grow despite earlier concerns over the Fiscal Cliff and the sequester, while China — the other major world economy — has avoided a hard landing, Bulltick’s Kathryn Rooney Vera told the Latin Trade CFO Forum held in Miami March 15. Bulltick is projecting 2 percent GDP growth in the United States this year. Despite the earlier concerns, the US economy continues to move ahead, driven by the recovery in housing and increased consumer spending. A double-dip recession “is not even a question anymore” in the US, and could only happen if China collapsed, Europe fell into disarray or some other major disaster occurred. In Latin America, the firm expects overall GDP growth of 4 percent, with Mexico expanding

Adriana Nuñez, VP Finance, Latin America Region, Mondele-z International

CONNECTING LATIN AMERICA’S CFO COMMUNITY

LATIN TRADE MARCH-APRIL 2013

MIAMI LT CFO Timothy Davis, VP of Finance & Control, SABMiller Latin America

Carmen Elena Carbonell, Corporate Director of Specialized Financial Services, CAF-Development Bank of Latin America

LT CFO Event in Miami

Kathryn Rooney Vera, senior emerging markets macroeconomic strategist & partner, Bulltick Capital Markets

Eduardo Gomez, CFO Latin American Region & Caribbean Region, Xerox Latin America

Carl Occhipinti, VP Finance. FedEx Express Latin America and Caribbean Division

CONNECTING LATIN AMERICAâ&#x20AC;&#x2122;S CFO COMMUNITY MARCH-APRIL 2013 LATIN TRADE

TECHTRENDS

CLONING THE Copies of e-commerce business schemes that have worked elsewhere in the world are gaining traction in Latin America BY CHARLES NEWBERY

uan Rossi speaks glowingly of e-commerce mer e ce in Latin America. He runs Ofelia Feliz, iz, an iz online marketplace for handmade and vintage ntage products as well as arts and craft supplies. This gives artisans – or anybody – a crack at doing oing what really interests them rather than being ng stuck in a job they hate. “It’s not e-commerce; it’s something that’s hat’ t’ss changing people’s lives,” he says. Rossi, 27, 7, co cco-founded Ofelia Feliz in 2011 in Argentinaa and soon expanded it to Brazil, Chile, Colombia, bia, Mexico and elsewhere. The business model is nothing new. It iiss a tweak on Etsy, an online marketplace launched nche hed d in 2005 and now the biggest of its kind in n the United States. “Copying models is much uch h simpler because you don’t have to reinventt the wheel,” Rossi said. “We saw that Etsy wass to totally replicable in Argentina.” He is not alone. Etsy clones have cropped up peed u p around the world, as have copies or spinoff s of ffs of ff eBay, Groupon and Pinterest.

LATIN TRADE MARCH-APRIL 2013

Investors are keen on the approach. “We We like models that have already proven to wo work in other geographies and have local traction,” on,” said Gonzalo Costa, a director of Nxtp Labs, abs, a Buenos Aires-based startup accelerator. With the cloning strategy, the risk shifts ftts to the capabilities of the entrepreneurs, Costa taa ssaid. aid. ai d. Nxtp helps out in the beginning with equity uity investments of $25,000 plus hands-on support, pport, office space, mentoring and networking. The region is bubbling with opportunities tie ies – and young people willing to give it a shot.. Th is This is for several reasons. First, money is available. abl blee. Latin American entrepreneurs such as Alec lec lec le Oxenford (DeRemate.com) and Wenceslao llaao Casares (Patagon) who made it during thee 1997-2000 dot-com bubble are financingg aand nd mentoring upstarts, so too are such venture re capital firms as California’s Accel Partnerss and and d New York’s Insight Venture Partners. Airbnb, bnb, bn Facebook and other foreign outfits have opened offices in São Paulo.

Costa said angel investors can bag as much as 400-fold profits after three to five years on equity investments in startups. It also has become cheaper, easier and quicker to launch online businesses. Cloud computing, for example, has reduced infrastructure set-up costs to $25,000 — $50,000, a fraction of the $500,000 for buying servers, data storage devices and other hardware in the 1990s and much of the 2000s. Getting the word out is easier on the pockets with Facebook, LinkedIn and Twitter. “With a little investment you can quickly find out what works.” Costa said. “If it fails, you lose only a small amount of money.” Alexis Caporale started Bixti, another Etsylike site, in 2010 with family funding. The platform gained users in Argentina and soon it was running in Chile, Colombia, Mexico and elsewhere. Caporale, 23, is like many of the new entrepreneurs in Latin America: young and without an MBA. This would usually scare investors, but the creation of Facebook by a young Mark Zuckerberg has changed things. Youth is no longer such a challenge – and it can be a benefit. They’ve grown up with Google and

ETSYMODEL

TECHTRENDS

Many of the new entrepreneurs in Latin America are young and without an MBA. This would usually scare investors, but the creation of Facebook by a young Zuckerberg has changed things. social networks. “We have it in our blood,” said Caporale. That may be so, but it also takes “smart, hard-working, resourceful and creative people” to turn ideas into viable businesses, especially as the easier it gets to start a project the more crowded the field becomes for consumers and financing, said Andy Kleinman, a startup investor and entrepreneur in Los Angeles. “There are a lot of people who don’t know what they are doing,” said Kleinman, who got his start in 1998 running an online music company as a high school student in Buenos Aires. “There are products that don’t work or that don’t have a business model to make them grow.” Those who do make it face promising prospects. Economic stability is building up the middle class in Latin America, while widening broadband, computer and smartphone penetration means more can shop online. Forrester Research expects online retail sales in Brazil, the region’s biggest e-commerce market, to more than double to $25.6 billion in 2017 from $12.2 billion in 2012. Argentina, Chile, Mexico and Venezuela, while smaller, are growing at an equally steady clip.

Artisans couldn’t be happier. Once confined to stores and outdoor markets, some are boosting sales five to 10-fold over the Internet, said Carlos Curioni, chief executive of Elo7, a Brazilian Etsy that started in 2008. Elo7’s gross merchandise sales surged 110 percent in 2012 on the year, and the same pace is expected this year, he said. Elo7 bought Bixti in 2012 to expand in Latin America, a strategy for both growth and survival. As more sites launch, Curioni, 35, expects the Etsy market to consolidate to a single dominant player, similar to what happened in the online auction and e-commerce field. MercadoLibre bought its main competitor, DeRemate, to become the eBay of Latin America. The latest entrant in the artisan fray in Brazil is Airu. Jaques Weltman, 29, launched the site in 2011 with backing from Rocket Internet, a Berlin-based online business developer. To stand out, his strategy is to provide a well-oiled service that is easy, quick and secure for buyers and sellers. It has, for example, incorporated shipping costs in the checkout and built up customer service workforce. Airu also launched with a 15 percent sales

commission, the first of its main competitors. Elo7 subsequently introduced a 5 percent commission. Ofelia Feliz is holding out. It charges roughly $3-$10 for sellers to promote their products on the home, category and search pages over seven- to 30-day periods. There are problems. Credit card use remains limited and online payment security is a concern. Banks, e-commerce sites and governments are trying to make online shopping safer with PayPal-like options that limit credit card fraud. A thornier problem is logistics. Most postal systems are costly, unreliable and slow. “The last mile to consumers is a huge challenge to achieve a broader penetration” of e-commerce, said Hana Ben-Shabat, a partner at A.T. Kearney, a management consulting firm. Clara Lagos, 37, knows this. She sold a hand-drawn poster on Bixti and took the bus to deliver it to the buyer on a street corner in Buenos Aires. That’s not sustainable for many orders, but she doesn’t mind. The site helps her expand sales beyond a few stores. “You may have to travel,” she said, “but you reach more people and that’s important.” Charles Newbery reported from Buenos Aires.

MARCH-APRIL 2013 LATIN TRADE

TRAVEL

business travelers love tech,” he said. “They usually travel with their own devices such as tablets and iPads.” According to Veloso, relatively affordable roaming charges from the telecommunications company Claro makes it more likely that travelers from Argentina and Brazil will use their own phones while visiting his hotel. “On the other hand, Mexicans usually request cellphones at the front desk, since mobile plans are usually very expensive down here.”

ROAD WARRIORS

GIRD UP WITH GADGETS Business travelers are using technology like never before. But it’s where they come from rather than where they visit that influences their choice of gadgets, hoteliers say. BY MARK CHESNUT

martphones, tablets and other gadgets have changed the way people travel. But according to hotliers, how travelers use technology, and what they demand when traveling, depends on the traveler’s destination and orgin. Brazilian business travelers, for example, are more likely to use hotel business centers to connect with the office, when compared with road warriors from the United States, United Kingdom, China, India and Germany. That statistic comes from Four Points by Sheraton, which recently conducted a survey comparing business travel habits among 6,000 travelers from those six nations. The survey also showed that 45 percent of Brazilian business travelers carry three or four tech devices when traveling (that is the lowest percentage of the groups surveyed; nearly 64 percent of US respondents said they carry that number). Smartphones and tablets were the most popular devices for the largest number of Brazilians. Latin Trade conducted an informal survey of general managers and hotel executives around the region. The aim was to provide additional insight into the use of technology by business travelers in the region. “It is normal to see executives — especially

LATIN TRADE MARCH-APRIL 2013

from Brazil, Chile and Mexico — with more than one device,” said Álvaro Valeriani, the Mexico City-based director of sales and marketing for Hyatt of Latin America. “You can now see more people with iPads than laptops, however in most of the cases they have both. iPhones and Blackberries are also mandatory items. Chileans still use more Blackberries than iPhones, but Brazilians use more iPhones.” The increasing popularity of Apple products presents its own challenges for business travelers and hoteliers, according to Valeriani, who noted that his company’s property in São Paulo recently invested in a technology upgrade. “Cables can be an issue, as only PC cables are widely available,” he explained. “So hotels are currently adding cables for Apple devices, available per request.” Hotel technology capabilities may also be limited by local regulations, Valeriani added. “For example, in Brazil the online payment processes still have lots of red tape. There is a need for printed documentation, signatures, etc, as requested by the local government. ” Pablo Veloso, general manager at the Buenos Aires Grand hotel, has also noticed that travelers from different regions use technology differently. “In my experience, I have found that Brazilian

A number of general managers at Hilton properties around the region reported noticeable trends in how guests use technology to conduct business. “Definitely, laptops and netbooks are leaving the scene,” said Hector Concari, general manager at the Hilton Santo Domingo. “Tablets are the key players.” Concari also reported that business centers are becoming less popular. “Guests prefer to work from their rooms or, in some cases, from the bars, and a few from the restaurants.” Patricio Alvarez, general manager at the Hilton São Paulo Morumbi, agreed that “the use of tablets is increasing at a very fast pace.” He added that the use of in-room telephones has been in sharp decline over the past few years. As travelers become increasingly dependent on tech gadgets, they are likely to need more help from the hotel staff, according to Tilo Joos, general manager at the Hilton Buenos Aires. “Requests we sometimes get are regarding the support they need in making their iPhones work in our country, i.e., selecting the appropriate carrier.” Nearly everyone agrees that moving forward, travelers will use smartphones for even more processes related to the travel experience. “In the near future, we are looking at big technological changes for Latin America — and especially in Lima,” said Llaura Castagnini, general manager of the Hilton Lima Miraflores, “such as electronic guestroom key cards configured to the guests´ smartphones at the time of check-in.” If anything shows the importance of technology to business travelers, it is the response to one particular question in the Four Points survey: When asked “If you could only bring one of the following to bed with you, which would you choose?” The largest percentage of respondents, from all six nations, ranked personal tech devices above their spouse or partner. Now that’s dedication to the job. Mark Chesnut reported from New York.

TABLETS ON THE RISE

TRADE: MERCOSUR

“The TTIP will deﬁnitely deal a blow to Mercosur, which is becoming more and more isolated.” - ISAAC COHEN

A TRADE PACT LEFT OUT IN THE COLD As the United States and the European Union get ready to launch an ambitious trade deal, Mercosur should reconsider its goals and strategies. BY DAVID HASKEL

ith the United States and the European Union ready to launch an ambitious bilateral trade deal, many in Latin America are starting to ponder the potential impact on Mercosur. For President Jose Mujica of Uruguay, which this year holds the South American trade pact’s rotating chair, the operative word is worry. “A trade deal between the US and Europe would create barriers to market access for those who are left out,” he warned recently in a radio address to the nation. To further complicate matters, while the world’s two largest players are seeking to boost two-way commerce under the proposed Transatlantic Trade and Investment Partnership (TTIP), the group comprising Brazil, Argentina, Venezuela, Paraguay and Uruguay has slipped into dormant mode, Mujica warned. “We cannot, we should not deceive ourselves — over the past few years Mercosur has been really stagnant, with growing difficulties for trading among its partners. More than a common market, it actually is nothing more than a bad customs union,” he emphasized. In case

LATIN TRADE MARCH-APRIL 2013

some people had not been listening, Mujica’s remarks were posted on the presidential website for all to see. The difference is significant: a common market is a comprehensive deal aimed at fostering the free movement of goods, services, capital and labor; a customs union is a mere free-trade agreement with a common external tariff. Trade experts say Mujica’s worries are not unfounded. “I fully agree with those observations,” Juan Pablo Lohlé told Latin Trade. Lohlé is a diplomat who in the 1990s headed an Organization of American States workgroup that sought to promote a free-trade zone throughout the Western Hemisphere. ”Watching the proposed US-EU deal one wonders, ‘What about us [in Mercosur]? What are our plans to promote trade?’” added Lohlé, a former Argentine ambassador to the OAS, Spain and Brazil. The diplomat blames strong protectionist policies in Argentina both for torpedoing the US plan to set up a Pan-American free trade zone and for the current problems in Mercosur. Plagued by constant infighting about

market access, Mercosur’s average common external tariff of about 15 percent constitutes a monumental barrier to many would-be trade partners. Isaac Cohen, a former Washington office head of the United Nations’ Economic Commission for Latin America and the Caribbean, is also concerned about the plans to link the world’s top two economic blocs. “Together, they represent one half of world production, with trade among themselves amounting to one third of world trade,” he told Latin Trade “The TTIP will definitely deal a blow to Mercosur, which is becoming more and more isolated,” Cohen warned. The group has not only turned its back on a Pan-American free trade zone. It has also spent more than 15 years in endless free trade talks with the EU that have so far yielded no visible results, he stressed. Both Lohlé and Cohen see the South American trading bloc drifting away from Europe and the United States and coming ever closer to China. Gaining access to the Chinese market is fine but not enough, as Beijing basically buys grains, beans, beef and similar commodities while it sells mostly industrial goods. Mercosur needs to diversify both its markets and its exports if it is to thrive in today’s increasingly competitive and globalized trade arena, they maintain. Their advice? Listen to Mujica. Particularly when he urges the bloc partners to reconsider their goals and strategies, throw their parochial mentality out the window, and fully embrace today’s world, one characterized by free trade, openness, and growing integration. David Haskel reported from Buenos Aires.

SPOTLIGHT

BUD CLOCK

THE

How Budweiser made a breakthrough in Ecuador, a market that had been dominated by one brand for a century. BY PAULA ANCERY

LATIN TRADE MARCH-APRIL 2013

venues,” says Diego Perdomo, creative director at Rivas Herrera Y&R Ecuador. “That’s how we reached the nightlife opinion leaders, the people who set the trends in fashion and consumerism”, adds Perdomo. The creative team behind the idea gained a powerful insight: “Make the very most of the happy hour”, and they reckoned that interaction with a digital component would make the experience more interesting. “The tricky part was summarizing the idea and being able to simplify it as much as possible, but still keep it attractive and powerful, and that took us four months,” says the agency. “When we reached the final idea, we consulted with our usual digital provider. QR codes aren’t well known in Ecuador; however, our target group had already come into contact with them,” Perdomo adds. The audience first encountered the idea upon entering the bar or restaurant. “It was a kind of nice surprise we had ready for them”, Perdomo points out. “We never wanted it to become widespread, just a pilot project to lead the way in terms of PR.” Perdomo considers that thanks to this and other activities, the agency and its client managed to raise Budweiser’s market position in Ecuador in two years. It was a market in which one company has dominated for 100 years. “Our aim was always to get people talking about it, using word of mouth to get people to try the product. Today, Budweiser is a strong contender in the Ecuadoran beer market. It’s an aspirational but accessible brand, be-

cause it’s already being brewed and bottled in the country”, says Perdomo. Paula Ancery reported from Buenos Aires.

FACT SHEET

Client: Ambev Ecuador Product: Budweiser Creative director: Diego Perdomo Account director: Roberto Cucalón Account executive: Emilio Guerrero Planning director: Gilda Valle Editorial department: Christian Vera Art directors: Ivonne Cantos, Xavier Samaniego Client approval: Eduardo del Pino Production and implementation: Wunderman

PHOTO: COURTESY OF BUDWESIER

uick-response bar codes seem to be one of those technological developments that arrived before people could realize their true potential. But in Latin America, however, people in the advertising industry seem to have caught on to their uses and applications. They do have a helping hand in the form of smartphones. The use of quick-response bar codes, also known as QR codes, requires smartphones to be accessed, and they are used in a similar fashion as are normal bar codes in supermarkets. It wasn’t until 2012 when people started to notice these small squares, with no recognizable letters or symbols, but only with more squares inside. In Latin America, you still have to be something of an expert to know how useful they can be. For example, they can be used for accessing a webpage by scanning the code with a phone that has the necessary application installed. Budweiser recently showed how to use QR codes effectively through Rivas Herrera Young & Rubicam, an advertising agency in Ecuador. The beer, a brand of the Ambev group, was presented at bars and restaurants in the cities of Quito and Guayaquil by means of the Bud Clock, which was designed by the agency for what it called Happy Hour 2x1. For every two bottles of beer sold, the customer would receive a placemat with a printed QR code. When the customer scanned the code with the Bud Clock, it added an extra minute to the happy hour. “The brief asked for an activity to generate a product test in flagship nightlife