Latin Trade (English Edition) - May/Jun 2011 by Latin Trade Group

LATIN TRADE

LATIN WIRELESS | BRAZIL CSR | MEXICO REBOUND

THE STORY OF THE MAKING OF A MODERN MULTILATINA

German Efromovich, Chairman of Avianca

Did you hear the one about the Bolivian who lives in Brazil and bought the airline in Colombia?

MAY / JUNE 2011

THE STORY OF THE MAKING OF A MODERN MULTILATINA YOUR BUSINESS SOURCE FOR LATIN AMERICA » WWW.LATINTRADE.COM

MAY / JUNE 2011

Year after year, our teams win the toughest competition in the world of sports: To please athletes and their supporters.

Sporting events put competence and talent to the test, not only of participating athletes, but of all those who make it happen. Arcos Dorados, the largest McDonald’s operator in the world, with more than 1.800 restaurants in Latin America, supports and promotes a series of sporting events and activities throughout the region. We take great pride in this and, at the same time, we know it’s a great challenge. And there is nothing more stimulating than the chance to showcase that to the world, through programs such as McDonald’s Olympic Champion Crew™, where we select the best employees to specially serve athletes, tourists and journalists during each edition of the Olympic Games. To achieve and maintain that position, we dedicate every day towards the search for excellence. Today, Arcos Dorados

employs over 80 thousand people in 19 countries and territories in Latin America. Most of them are young people, full of dreams and ambitions, who have just entered the work force. With career development and top performance in mind, we are permanently investing in training and incentives programs. Making sure all of us, at all levels, always give our best to improve the area that we love the most: serving you well. This takes the same dedication with which athletes challenge the laws of physics and take flight. It is the magic that drives one human being to truly move others. The passion that moves all sports. These are the same forces that drive the McDonald’s team. And you can count on it at the next FIFA World Cup Brazil 2014™, at the London 2012 Olympic Games, or even today, if you stop by at any of our restaurants in Latin America.

LATIN TRADE SYMPOSIUM IN PARTNERSHIP WITH:

LATIN TRADE The premiere meeting of top CEOs, ﬁnanciers, leaders and social entrepreneurs in the Americas.

SPONSORS Presenting

Gold

LATIN AMERICA ON THE GLOBAL STAGE: COMPETITIVENESS FROM THE GRASSROOTS UP » Using Corporate Social Responsibility, Sustainability and Innovation » Keeping Pace in the Global Race » Asian and Latin American Connections » Sustainable Communities » Energy and Natural Resources

October 28 Four Seasons Hotel Miami

What works, what counts Don’t miss out on this unique discussion and debate on strategies that help companies, countries and organizations gain a strategic edge.

Silver

Media Partners CNN EN ESPAÑOL FINANCIAL TIMES

Contact: Ana Piñon Events Manager Tel: (305) 755-4716 apinon@latintrade.com

SYMPOSIUM 2011

Past participants have included: Álvaro Uribe, Former Colombian President Celso Amorim, Former Brazilian Foreign Minister Luis Alberto Moreno, President, Inter-American Development Bank Daniel Servitje, CEO, Grupo Bimbo Woods Staton, President and CEO, Arcos Dorados Luciano Coutinho, President, BNDES, Brazilian National Development Bank Enrique García, President and CEO, CAF, Andean Development Corporation Pilar Nores de García, First Lady of Peru and President, Work and Family Institute Lorenzo Mendoza, CEO, Empresas Polar Song Dongsheng, Executive Vice President, Sinohydro Corporation Alberto Alemán Zubieta, CEO, Panama Canal Authority Ronald Pantin, CEO, Paciﬁc Rubiales Energy Douglas Tompkins, Founder, Foundation for Deep Ecology

L ATIN TR ADE

Latin Trade will also celebrate 17 years of the BRAVO Business Awards following the Latin Trade Symposium. www.latintrade.com

CONTENTS

M AY/J UNE 2011 V O L. 19 NO . 3

42 60 xx

28 Features

28 German Efromovich: A Hardworking Visionary

Industry Report: Latin America’s Wireless Boom

Latin America’s wireless sector, the fastest growing in the world, is expected to expand even more rapidly.

Large companies with regional or global interests as well as foreign subsidiaries in Brazil lead the way in sustainable practices. Their examples, coupled with the influence of the financial sector, are fostering activity among a broader range of companies.

Industry Report: Wireless Latin America: Double-Digit Growth The number of wireless phones is growing by double-digits in Latin America. A big winner among the manufacturers: Korea’s Samsung.

Country Report: How Safe is Mexico? Business leaders and experts weigh in on the realitiies of doing business in a country with drug violence.

Special Report: Trade & Logistics Latin America’s Free Trade Pacts Current and pending agreements around the region.

66 48

Special Report: Trade Growth Boosts Logistics The outlook for trade with Latin America is solid, say experts and logistics executives, who cite demand from Asia, an economic rebound in the United States and an expanding domestic market in Brazil.

Country Report: Mexico: Positive Business Outlook Coming off a strong economic recovery in 2010, local and foreign investors are optimistic about the outlook for 2011 and beyond. First Person: Q&As with top executives from General Motors México and Emerson Latin America.

Special report: Brazil’s Leaders in Corporate Social Responsibility

Special Report: Trade & Logistics Freer Trade... with More Rules Latin America is the freest trading region in the world — on paper. A guide to navigating the complex requirements to get the most out of these accords.

COVER PHOTO SHOT ON LOCATION IN SÃO PAULO BY PAULO FRIDMAN FOR LATIN TRADE

LATIN TRADE

05-06/2011

EFROMOVICH: PAULO FRIDMAN; MEXICO: COURTESY OF GM; TRADE & LOGISTICS: COURTESY OF UPS.

The chairman of Avianca talks to Latin Trade about his vision and plans for the airline he purchased out of bankruptcy in 2004 as he sets the course for growth.

CONTENTS

Santiago, Chile

The Scene

Opinion

On the Road

12 Snapshot: Digital Cameras

22 BRAVO Forum

74 Bogota

Softek CEO Blanca Treviño argues that Latin American innovations are often unacknowledged by the rest of the world.

14 English as Lingua Franca Globalization fuels demand for English-speaking workers — and English-language instruction.

16 Inflation Champions Two countries in Latin America had the highest rates of inflation in 2010 in the world.

18 Flying to Europe Air traffic between Latin America and Europe increased last year, with São Paulo a key destination.

20 Uruguay: Solid Outlook Government officials and analysts predict sustained economic growth in 2011.

LATIN TRADE

05-06/2011

A practical guide for the business traveler visiting the Colombian capital.

75 Ask the Concierge 24 The Contrarian John Price, managing director of Americas Market Intelligence, warns market entrants to be prepared for a bumpy playing field.

26 The Bottom Line

Advice from Daduis Santiago of the JW Marriott Bogota.

Made In: Brazil 76 Orange Juice The biggest producer of oranges in the world sends most of its juice exports to Europe.

Alberto Bernal-Léon of Bulltick Capital Markets lauds the status accorded to entrepreneurs in contemporary Chile.

Tech Trends

Editor’s Note

73 Brazilian e-invoicing

A legal mandate to shift from paper to digital invoicing brings unexpected benefits.

The Case for Free Trade

CHILE: COURTESY OF PROCHILE; BOGOTA: COURTESY OF PROEXPORT.

More mobile phones have a camera function but sales of digital cameras are growing.

SOME THINGS YOU CAN’T TAKE BACK IN YOUR SUITCASE.

Isn’t the real excitement of travel having experiences that still enthrall you? At InterContinental, we use our expert local knowledge to help you enjoy what makes a destination unique. At Nordelta, Argentina, for example, challenge yourself to 18 stunning holes on an exquisite Jack Nicklaus golf course. Set sail on the Paraná River delta. Or join a 100-year-old rowing club for the day. And all this just 30 minutes away from Buenos Aires, one of the most vibrant and colorful cities in the world.

Do you live an InterContinental life?

Visit www.intercontinental.com

EDITOR’S NOTE

While the United States has been dillydallying on free trade with Latin America, the rest of the world has not. The European Union has caught up with the United States when it comes to Colombia, Peru and Central America, undermining the U.S. advantage with those areas. Meanwhile, both Canada and the European Free Trade Association have signed FTAs with Colombia and Peru. Korea reached an FTA with Peru and is negotiating one with Colombia. And China — the second-largest trade partner for Latin America — now has FTAs with Chile, Costa Rica and Peru.

Panama Canal

As Romaine Seguin, the president of the Americas division of U.S. logistics giant UPS, points out in this issue: Robust and open global trade drives the world’s economic engine. “Free trade agreements between countries in Latin America, or any other region in the world … remove significant trade barriers and provide key economic opportunities for the businesses and citizens in each country,” she says. Countries that have free trade agreements with the United States have generally increased their trade significantly upon entry into force of those agreements, experts at the Peterson Institute for International Economics point out. The United States appears to finally be moving on the Colombia and Panama FTAs after a scandalous delay. The Colombia FTA, for example, was negotiated five years ago, but then suffered from U.S. domestic politics. The good news for U.S. exporters is that with the implementation of the Colombia and Panama FTAs in the future, a majority of countries in Latin America will have free trade with the United States. Latin American countries with existing or pending FTAs with the United States account for 79 percent of U.S. trade with the region, according to a Latin Trade analysis of U.S. Census Bureau data for 2010. Although the Free Trade Area of the Americas agreed upon in Miami in 1994 appears to be dead, we will instead have an FTAA Light. And that’s worth celebrating, as we hope for a bilateral U.S. FTA with Brazil as the logical next step.

TIZIANA FABI/AFP/GETTY IMAGES/NEWSCOM

The Case for Free Trade

Mexico has a lot of great things going for it. Its economy is recovering strongly, its wage gap with China is quickly narrowing, and it’s still relatively safe for investors and tourists alike (see our special report on Mexico in this issue). Yet, the Mexican government has done an outrageously bad job at selling the latter point. When I prepared for a segment on “The O’Reilly Factor” recently, I could not find relevant and updated data from the Mexican government on the security situation. The Mexican embassy in the United States even posted a year-old fact sheet on the issue, and calls and e-mails to key media people went unanswered. Mexico should follow the lead of Colombia, which under former president Alvaro Uribe not only improved the security situation, but also made sure everyone remotely interested knew so as well. That effort included monthly updates on crime statistics on the president’s official web site. Mexico’s image is only getting worse day by day, driven by the headlines of drug-related killings. It is therefore essential that

LATIN TRADE 05-06/2011

Mexico’s government responds with the actual facts and figures on safety (chiefly that 90 percent of the victims are drug-gang members, and seven percent are law enforcement members). Join forces with the private sector (including hotel chains) to start a campaign that includes ads in newspapers and TV with the message that Mexico is safe and open for business and tourism. Mexico now clearly needs to fight another war — one of information.

Joachim Bamrud Executive Editor jbamrud@latintrade.com

PANAMA CANAL: COURTESY OF MICI.GOV

Mexico: Missing in Action

USERS OF LATIN BUSINESS CHRONICLE SAY:

LATIN TRADE EXECUTIVE DIRECTORS ROSEMARY WINTERS rwinters@latintrade.com MARIA LOURDES GALLO mgallo@latintrade.com EXECUTIVE EDITOR JOACHIM BAMRUD jbamrud@latintrade.com MANAGING EDITOR MARY SUTTER msutter@latintrade.com

Your news helps us stay abreast and, in some cases, even stay ahead of our competition in significant small ways.” NAI Global “ It’s an easy system to use for those of us who have little time on our hands.” Intelsat “Latin Business Chronicle [is] rapidly becoming required reading for anyone interested in Latin America.” Foreign Policy

ART & PRODUCTION DIRECTOR ELIZABETH CARLISLE ecarlisle@latintrade.com GRAPHIC DESIGNER SELVIN CHI schi@latintrade.com CONTRIBUTING EDITORS GABRIELA CALDERON (research), MARK LUDWIG REGIONAL CORRESPONDENTS Argentina: Charles Newberry • Brazil: Taylor Barnes, Vincent Bevins, Andrew Downie, Thierry Ogier Chile: Gideon Long • China: Ruth Morris • Colombia: John Otis France: Ilan Moss • Mexico: David Agren, Ronald Buchanan • Panama: Sean Mattson Peru: Lisa K Wing • Spain: Guy Hedgecoe • Venezuela: Jose Orozco CONTRIBUTING PHOTOGRAPHERS Brazil: Paulo Fridman, John Maier, Jr. • Chile: Helen Hughes Costa Rica: Juan Carlos Ulate • Peru: Alejandro Balaguer TRANSLATION: Alejandra Labanca, Douglas Rojas-Sosa COPY EDITORS: Nancy Dahlberg, Julio Llerena, Stuart McMeeking, David Wisor EVENTS & CONFERENCES EDITORIAL DIRECTOR Jane Bussey, jbussey@latintrade.com EVENTS & SPECIAL PROJECTS MANAGER Ana Piñon, apinon@latintrade.com SALES & CIRCULATION SALES REPRESENTATIVES Miami/Pan-regional sales: Silvia Clarke, Senior Account Manager, sclarke@latintrade.com Miami: Ana Berger, Special Projects Coordinator, aberger@latintrade.com Colombia/Panama: María Cristina Restrepo, mscrestrep@etb.net.co India: Stephen Dioneda, stephen@bsacmena.com CIRCULATION COORDINATOR Claudia Banegas, cbanegas@latintrade.com

For more information:

Page

LATIN TRADE 05-06/2011

LATIN BUSINESS CHRONICLE Rosemary Begg, Marketing Associate, rbegg@latintrade.com MANHATTAN MEDIA CHAIRMAN RICHARD BURNS CHIEF OPERATING OFFICER JOANNE HARRAS ACCOUNTS MANAGER KATHY POLLYEA, kpollyea@manhattanmedia.com LATIN TRADE GROUP IS A DIVISION OF MIAMI MEDIA, LLC, A SUBSIDIARY OF MANHATTAN MEDIA Executive, Editorial, Circulation and Advertising ofﬁces are located at Brickell Bay Ofﬁce Tower, 1001 Brickell Bay Drive, Suite 2700, Miami, Florida 33131, USA. CUSTOMER SERVICE AND SUBSCRIPTIONS: Please visit www.latintrade.com to order online or call +1 (305) 749-0880. Latin Trade (ISSN 1087-0857, USPS 016715) is published bimonthly by Miami Media, LLC. All rights reserved. Reproduction in whole or part of any text, photograph or illustration without written permission of the publisher is strictly prohibited.

Visit Latin Trade online @ www.latintrade.com

THE SCENE SNAPSHOT: DIGITAL CAMERAS

amera phones may be the go-to choice for documenting good times with friends — or revolutions in North Africa and the Middle East — but the market for dedicated digital cameras is growing in Latin America, makers of the device say. Nikon estimates that unit sales for digital cameras among all manufacturers increased 30 percent in Latin America in 2010 compared to 2009. “Nikon sales outperformed this level,” a company spokesman says, crediting the big jump to a signiﬁcantly expanded distribution network in Mexico. Panasonic maintained that industry growth was a more modest 13 percent in 2010 and that its own camera sales rose about 10 percent in the region, where it says it has been steadily building up market share. Brazil is the single largest — and fastest-growing — market for digital still cameras, followed by Mexico and Argentina. Technological advances are resulting in marked improvements in camera functionality on phones, which industry analysts think will undercut prospects further for certain digital cameras. Panasonic says it has not experienced erosion. “We do not see the loss of camera sales due to the mobile devices, currently. We believe that evolution in technology is not only for mobile devices but also for digital cameras,” says Satoshi Oikawa, the São Paulo-based head of marketing for Panasonic

Latin America’s top European Union partners Country

Trade

Change

Germany

41.40

31.00%

Netherlands

25.80

35.90%

Spain

21.90

29.70%

Italy

20.30

31.90%

16.10

35.30%

2010 ﬁgures in billions of euros. Percentage change versus 2009. Source: Latin Business Chronicle

LATIN TRADE 05-06/2011

Bernal-León’s Breakfast Test Alberto Bernal-León, head of research for Bulltick Capital Markets, has developed an informal test that gives an indication of how well a country does overall. When traveling in the region, he orders room service and asks for scrambled eggs with six ingredients. “If the hotel gets it right, it usually means that the country will‘make it,’ [but] if they [mess] up the order, [that’s] obviously a bad sign,” Bernal says. “Orders in Mexico, Chile and Colombia have arrived OK. In Venezuela and Ecuador and Guatemala, the eggs did not arrive as I ordered them.” Mexico, Chile and Colombia rate high among foreign investors and are set to see economic growth of 4.6 percent, 5.9 percent and 4.6 percent, respectively, this year, according to estimates from the International Monetary Fund. Meanwhile, Venezuela will likely see 1.8 percent growth, while the economies of Ecuador and Guatemala should expand 3.2 percent and 3 percent, respectively, the IMF predicts.

SNAPSHOP: COURTESY OF NIKON; BREAKFAST: ISTOCK

Top Partners

Latin America. “Globally, the trend in the camera market shows [a shift] to a bipolarity of high-end models on the one side and entry models on the other.” The mirror-less system, which makes digital cameras even more compact, is catching on, Oikawa says. “We are aiming to become a top camera brand by establishing stable position in this new category with our Lumix G series.” Panasonic projects that industry sales will grow at a more modest rate in 2011, at about 7 percent. Nikon expects to outperform the market again in 2011, the company says. Based on its success in Mexico, “we believe there are many other areas that pose signiﬁcant growth opportunities for Nikon in the future,” the company stated.

WITNESS THE UNVEILING OF TWO WESTIN FIRSTS We celebrate the opening of the first Westin in South America and the first Westin All Inclusive Resort in Costa Rica. Be among the first to experience The Westin Lima Hotel & Convention Center, located in the heart of San Isidro in Lima, Peru, with access to the financial district and fine shopping. Be one of the first to discover our All Inclusive Resort, The Westin Resort & Spa, Playa Conchal in Costa Rica.

CONTINUE TO EXPERIENCE WESTIN AT THE MOST SPECTACULAR DESTINATIONS IN LATIN AMERICA:

` )=: ,:HI>C ':HDGI (E6 6C8JC ` )=: ,:HI>C !6<JC6B6G $8:6C ':HDGI +>AA6H 6C8JC ` )=: ,:HI>C ':HDGI (E6 %J:GID +6AA6GI6 ` )=: ,:HI>C ':HDGI (E6 !DH 67DH ` )=: ,:HI>C (6C !J>H %DIDH> ` )=: ,:HI>C 6B>CD ':6A J6I:B6A6

LOOK FOR THESE NEW PROPERTIES COMING IN 2011: ` )=: ,:HI>C %A6N6 DC>I6 %6C6C6 ` )=: ,:HI>C J696A6?6G6 ` )=: ,:HI>C %6C6B6 DI:A

For more information, visit www.westin.com/latinamerica

THE SCENE English as Lingua Franca

LATIN TRADE 05-06/2011

the other fluent but with no MBA — the company would favor the English speaker, says Carmen Raygada, a former human-resources director for South America for the U.S.-headquartered manufacturer of agricultural machinery and construction industrial equipment. John Deere employs 4,500 people in South America, and, depending on the position, “we use English 70 percent of the time,” Raygada says. English can take a long time to master, “compared to an MBA that can be done in three years.” Robust demand in Brazil reflects two main trends, says Jose Ricardo Noronha, director of sales in Brazil for GlobalEnglish. Multinationals are expanding — or entering — Brazil to take advantage of the booming local economy. At the same time, “a bunch of Brazilian companies are becoming multinational, expanding their international operations,” Noronha says. The financial services and banking industries, as well as tax and accounting consultancies, have been core customers for GlobalEnglish in the region, according to Antonio Pastor, the company’s vice president of corporate sales in Latin America. A key driver is also the energy sector, he says, from the oil and gas producers to the myriad companies that service and support them. Energy is strong for Berlitz in Brazil as well, says Roman, who noted that his company also sees business with meat and poultry exporters, construction firms (especially those active in Africa) and resort developments in the northeast of the country.

Arcos Dorados. The Argentine-based company, the world’s largest McDonald’s franchisee, raises $1.3 billion in an IPO on the New York Stock Exchange. Paraguay. Its economy jumped by 15 percent last year — the best result of any Latin American country over the past 30 years. Barack Obama. The U.S. president finally agrees to push for the five-year old U.S.-Colombia free trade agreement. Hugo Chávez. The Venezuelan president manages to set a world record in inflation: 28.2 percent in 2010. Guido Mantega. Brazil’s finance minister spearheaded efforts to get Roger Agnelli, the widely-respected CEO of Brazil’s largest private company Vale, fired. The action was negatively received by investors. Mercosur. The South American Common Market turned 20, yet had little to celebrate given ongoing trade and economic disputes, especially between top members Brazil and Argentina. Sources: Arcos Dorados, Latin Business Chronicle (Paraguay and Venezuela).

First Food

Per-capita sales of baby food in 2010 Mexico ............................................ $14.10 Uruguay ............................................ $7.30 Brazil ................................................ $5.50 Venezuela ......................................... $5.50 Chile .................................................. $4.40 All ﬁgures in U.S. dollars. Source: Euromonitor International

ISTOCK

andarin may have the most speakers in absolute terms, but in the globalized economy of the 21st century, English is the language of international business. And as much of the communication involves nonnative speakers — from the exporter in Santiago negotiating with a buyer in Shanghai or the conference call with participants in São Paulo, Paris and Prague — demand for English-language instruction is on the rise. Veteran language instructor Berlitz has experienced a steady increase in demand for English since 1995. Back then, English accounted for 65 percent of all lessons worldwide; last year, the global share of English was up to 72 percent. In 2010 Brazil was the largest market in Latin America for Berlitz, accounting for 35 percent of sales within the region. Mexico is the secondlargest market in Latin America, at 25 percent, says Marcelo Roman, senior vice president of Berlitz Americas Region, who adds that business is growing in countries like Colombia, Chile and Peru. For online specialist GlobalEnglish, which focuses exclusively on corporate customers, Brazil has emerged as its No. 1 market worldwide, bigger than China right now. GlobalEnglish conducted a global survey of multinational employees; in Brazil alone, roughly half of the respondents said their skills were not sufﬁcient to do their jobs. For many companies, English is indeed critical. So much so that at John Deere, given a choice between comparable job candidates — one with an MBA but limited English,

As the worldâ&#x20AC;&#x2122;s 4th largest supplier of ocean freight services and thanks to our unique central procurement and capacity management we leverage our global presence to your advantage. Whether itâ&#x20AC;&#x2122;s FCL, LCL, NCL or any service

Your contact : oceanfreight@panalpina.com

on our Pantainer Express Line, we always offer you customized solutions, even when capacities and equipment are limited. Applying our expert knowledge, we are driven to find ways to create value for your company.

Find a list of all Panalpina offices on www.panalpina.com

THE SCENE INFLATION CHAMPIONS Argentina’s economy grew by 9.2 percent last year — Latin America’s second-best performance, after Paraguay. This year, Argentina’s economy should expand by another 6 percent, the International Monetary Fund estimates. Nomura Securities is more bullish, estimating an 8 percent expansion. The strong growth is caused by a combination of factors, including a boom in agricultural exports and a local consumption boom. Yet the country faces a major economic cloud: inflation. The high rate is creating significant problems for local and foreign investors as they try to keep up with rising wage demands and higher local costs. Argentina’s inflation rate of 24 percent last year was the world’s second-highest, according to a Latin Busi-

ness Chronicle analysis of data from the IMF and Argentine consultancy Ecolatina. This year, inflation will likely get worse, reaching 26 percent, the consultancy estimates. Economy Minister Amado Boudou says there is no problem and that inflation is under control. He and other officials also use a much lower rate, which private-sector economists say is without credibility after years of government manipulation of the official statistics agency INDEC. Even the pro-government CGT union typically asks for much higher wage increases than the official inflation rate. Argentina could learn a thing or two from Peru, which has had strong economic growth for years while posting one of the lowest inflation rates in Latin America. Although Peru’s economy grew by 8.8 percent last year,

not much lower than the rate in Argentina, its inflation increased by only 1.5 percent, the second-lowest rate in Latin America. This year, Peru will likely see a 2.7 percent consumer price increase, but that will still be the best result in the region, according to the Latin Business Chronicle analysis of IMF estimates.

Argentina can take some comfort in that it is not the worst country when it comes to inflation. That honor goes to Venezuela, which last year posted an official rate of 28.2 percent — the highest anywhere in the world. This year, Venezuela’s inflation is expected to reach 29.8 percent, the IMF estimates.

INFLATION CONTRASTS Argentina

Sources: IMF, Ecolatina, Latin Business Chronicle

Polar Time

Tablets Take Off

Per capita consumption of beer in 2010 in liters

Media tablet purchases in Latin America, in thousands of units

COUNTRY Venezuela ...........................61.1 Mexico ................................46.7 Argentina............................38.9 Peru ...................................35.3 Ecuador ..............................32.2 Brazil .................................22.8

Year Sales Growth 2009 .................... 0 ........... N.A. 2010 ............... 111.9 ........... N.A. 2011 ...............264.3 .......... 136% 2012* .............567.3 ...........115% 2013* .............926.5 ........... 63% 2014* .........1,702.20 ........... 83%

Source: Euromonitor International *Estimates Source: Gartner

LATIN TRADE 05-06/2011

Peru

THE SCENE Quoted

Air Trafﬁc: European Boom

espite economic turmoil in several countries, more flights traversed the Atlantic from European airports to all points in Latin America and the Caribbean in 2010 compared to 2009. According to data from OAG, a UBM Aviation business, the number of annual flights from Europe to the region was 51,701 last year, up 3 percent from 50,401 in 2009. Certain fast-growing routes stand out, likely reflecting the robust economies on the destination end. These include MadridLima, where carriers added 19 percent more flights compared to 2009, ending 2010 with 1,077 flights. Flights from Lisbon to São Paulo increased by 16 percent to 576. And although 14 percent fewer planes flew from Madrid to Buenos Aires last year, it remained the single-busiest route between Europe and Latin America, with 1,463 flights in 2010. São Paulo overall was the top businesscity destination for flights originating from such key European cities as Paris, London, Frankfurt, Lisbon and Milan. The busiest European airport for Latin America-bound traffic is Madrid.

“We offer direct flights to all the capital cities” from Spain, says Manuel Lopez Aguilar, executive vice president for commercial and customers at Iberia, Spain’s leading airline. It doubled its service to Colombia and Peru in September, followed by Mexico in October. Also in October, Iberia added the new destinations of Cordoba in Argentina and El Salvador, along with four weekly direct flights from Madrid to Panama City that represent a shift away from San Jose, Costa Rica. “Since last year there has been a lot of growth,” Lopez Aguilar says. “In 2011, we are in a new stage of growth.” Already in 2011 Iberia has launched service between Madrid and Fortaleza/Recife in Brazil and inaugurated direct flights between Madrid and Los Angeles and Barcelona to Miami. In June, it will introduce direct service between Barcelona and São Paulo. Mexico is also an important market for Iberia, given the deep ties between it and Spain, Lopez Aguilar maintained. “In our case we have doubled the number of flights [from 7 to 14 weekly],” he says. “This is a bet for the future.”

Top Links Busiest air routes, Europe to Latin America, ranked by annual ﬂights direct to capitals and major business cities ORIGIN Madrid * Paris Madrid * Madrid * Madrid Paris Paris Madrid Madrid Madrid Madrid London Frankfurt Madrid * Lisbon Rome Lisbon Madrid Milan Paris

DESTINATION Buenos Aires São Paulo Mexico City São Paulo Lima Rio de Janeiro Mexico City Caracas Bogota Santiago de Chile Havana São Paulo ** São Paulo Santo Domingo São Paulo Buenos Aires Rio de Janeiro Quito São Paulo Havana

2009 FLIGHTS 1,706 1,343 1,208 1,068 905 996 864 836 944 731 917 730 727 679 498 550 495 597 513 339

2010 FLIGHTS 1,463 1,354 1,181 1,132 1,077 1,007 977 927 856 782 749 730 730 697 576 572 560 463 401 366

CHANGE -14% 1% -2% 6% 19% 1% 13% 11% -9% 7% -18% 0% 0% 3% 16% 4% 13% -22% -22% 8%

*Includes ﬂights that originate in Barcelona. ** Includes ﬂights that continue on to Buenos Aires or Rio de Janeiro. Source: OAG/UBM Aviation

LATIN TRADE 05-06/2011

“I’ve been telling him he should clean up his rightside mirror and his left and on the top, because I am going to pass through on one of these sides.” Eike Batista, Brazil’s richest man, on his goal to pass the fortune of Mexican mogul Carlos Slim, the world’s richest, as quoted by Bloomberg.

“They’re like a bull in a china shop, but so far they’ve only broken a little bit of glass.” Maxinver analyst Eduardo Blasco, commenting in The Wall Street Journal on the economic policies of Argentina’s government.

“Innovation doesn´t have to be rocket science, but to simply think differently.” Omar Hauache, CEO of Fleury in Brazil, at the SAP Forum in São Paulo

“Unless you’re involved in narco trade or driving across the border, it’s not an issue.” Trip Barrett, vice president of brand management in Latin America for Starwood Hotels and Resorts, in Latin Trade on the impact of drug violence in Mexico on tourism and business

“It’s going to be the decade of Brazil.” Rodolpho Cardenuto, president and CEO of SAP Latin America, in Latin Business Chronicle

“In three years we won’t be printing any booklet.” Natura CEO Alessandro Carlucci at the SAP Forum in São Paulo.

Logistics challenge? Bring it on.

Linking North America with Latin America, Europe, the Mediterranean, Australia/New Zealand and the South Pacific Islands. For more, visit us at www.hamburgsud.com

No matter what.

THE SCENE Uruguay: Strong Growth, Solid Outlook

The

Just a decade ago, Uruguay was mired in crisis brought on in part by the economic collapse of its neighbor and most important trading partner, Argentina. This year got off to a strong start, with the January announcement of the second-biggest foreign investment in the country’s history: a joint venture between Finland’s Stora Enso and Arauco of Chile that will invest $1.9 billion to build a pulp mill. Strong demand for agricultural products is reflected in land prices. Ten years ago, the price of land was $300 a hectare; now it is $3,000 a hectare, officials say. The ability to continue to attract FDI and to foster sustained further economic expansion demand government investments in infrastructure and education, officials say. “Forestry development implies roads, river transport — all-new infrastructure,” Uruguayan Finance Minister Fernando Lorenzo tells Latin Trade. So do government

economic indicators coming out of Uruguay give government officials much to cheer about. Last year, the economy grew by 8.5 percent, the fourthhighest increase in Latin America, according to a Latin Business Chronicle analysis of data from the International Monetary Fund (IMF). Officials estimate growth of 5 to 6 percent this year. J.P. Morgan predicts that GDP growth may end up even higher. “Both domestic and external demand continues to climb at a very healthy pace,” a bank report stated. “The ever-important tourism industry continues to make an important contribution to growth, as do other service sectors, particularly software, transportation and logistics.” Meanwhile, foreign direct investment hit a record $1.6 billion last year, up 29 percent from 2009.

efforts to position Uruguay as a regional logistical hub. As a result, Uruguay is creating a regulatory framework to promote publicprivate partnerships in areas like ports. Energy is another key sector for investment because Uruguay relies heavily on imported oil. The government has set out a five-year goal to generate 50 percent of its energy from domestic, renewable resources. In mid-March, the state-owned power company UTE awarded contracts to three companies that will each build a 50-megawatt wind farm. No government funds will be invested, and the UTE will purchase electricity at a negotiated rate. Tourism, which generates over 6 percent of GDP, has been evolving but needs to develop additional options in order to expand. To offset the summer-oriented nature of the industry, Uruguay is seeking to construct convention centers that will attract meetings and conventions in the off-season.

REGION’S RICHEST Estimated fortune in U.S. dollars NAME

FORTUNE

CHANGE

Carlos Slim, Mexico

$74 billion

38.3%

Eike Batista, Brazil

$30 billion

11.1%

Iris Fontbona, Chile

$19.2 billion

74.5%

Hungry Pets Per capita sales of dog and cat food in 2010 Chile...................................... $90.60 Brazil .................................... $78.20 Venezuela ............................. $68.10

German Larrea, Mexico

$16 billion

64.9%

Argentina .............................. $53.90 Mexico .................................. $35.00

Jorge Paulo Lemann, Brazil

$13.3 billion

15.7% Amounts in U.S. dollars. Source: Euromonitor International

Notes: 2010 ﬁgures, percentage change from 2009. Sources: Forbes (estimates), Latin Business Chronicle (rank)

LATIN TRADE 05-06/2011

BRAVO FORUM Innovation vs. Invention: LatAm’s Quiet Success Latin America is not commonly associated with innovation. But it should be. The deeply rooted concept that innovation equates only to new products might be part of the problem. Latin America lags behind North America, Europe and Asia in generally accepted indicators of innovation, like the number of patents registered or investment in R&D. No Latin American company figures in the list of Most Innovative Companies. Indeed, these indicators are worrisome and need to be addressed. But innovation is not just about inventing new things, and the next “big idea” is sometimes

Starbucks is a fantastic innovation. It is not an innovation unless it is sold.” With that in mind, when we look at successful Latin American companies, we can acknowledge that their success arises from innovating around business models, around logistics, around production or pricing strategies. Bimbo, the Mexican baking company that recently acquired Sara Lee Bakery in the United States, has introduced new successful products to the market in its history, products like Negrito Bimbo or Bimbuñuelos. But perhaps they’ve collected most fame from products that were invented elsewhere, like Submarino (Twinkie) or Pingüino (Cupcake), or its staple sandwich bread. These are arguably the more “obvious” signs of the company’s innovation because of their greater visibility. Taking a closer look at the company’s operations, however, you can see that the company’s success — beyond its extremely well-managed organization — is largely attributed to its production and distribution. Coca-Cola may be the only one that can match Mexico’s bread maker Bimbo and them in coverage, as they are literBrazil’s Alpargatas, the manufacturer of ally everywhere in Mexico. No Havaianas sandals, are two examples of matter how small the town, or Latin American innovators. ranchería, no matter how remote, you’ll find “Pan Bimbo” around the corner. small or intangible and large in impact. Putting Another example is Alpargatas from Braall the pieces together to work in ways that create a competitive advantage can be highly inno- zil. They didn’t invent the flip-flop, but their Havaianas sandals have become an element vative. The greatest beneficiary of the invention of fashion and are one of the most successful of the mainframe computer may not have been products in the history of the shoe industry. IBM, but Walmart, which cleverly used the They have achieved this by maintaining information to identify demand and optimize great product distribution and great marketits supply chain. ing but, most importantly, great design. They Apple didn’t invent the touch screen or the pay a lot of attention to selecting materials cellular phone or the digital music player. But Apple put all those elements together and made that contribute to comfort, and through their them work in a way that no other company had design, they assure these do not go unnoticed. Before Havaianas, flip-flops were designed previously done. to go unnoticed. Perhaps this is their greatest Edmund Phelps, the 2006 Nobel Prize wininnovation. ner in economics, told a New York audience Alpargatas is not the only company that last year: “The Segway is a great invention, but

LATIN TRADE

05-06/2011

makes comfortable sandals, yet no other sandal tops the Havaianas’ trendiness. Banco Compartamos in Mexico caters to low and middle-income groups that have historically been excluded from the commercial banking sector. The average loan of Banco Compartamos is $450, and 98 percent of the bank’s 1.3 million clients are women. With its strategy, the bank is not only penetrating an untapped market (which according to some may represent up to 70 percent of the population of Mexico), it is also fostering innovation through providing working capital to microentrepreneurs. The bank still has challenges to increase its profitability, which will be driven by reducing the cost of customer acquisition. But it has proven to be in a very promising market, since in 2009 it held just 2.26 percent of overaged accounts, comparing very favorably to Mexico’s average of 4.0 percent. Latin America has a tradition of being very conservative, even shy, in promoting its own success stories. In the United States or Europe, you seldom see marketing or PR materials about Mexico’s pro-business environment, Peru’s BRIC-like growth rate or Colombia’s remarkable turnaround story. The fact that Anheuser-Busch, a staple of the American pop culture, was acquired by a Brazilian company has gone unnoticed by the American public, which is perhaps a direct example of Latin America’s subdued arrogance. It may take several years for the world to start noticing how innovative Latin America really is. In the meantime, it may serve you to pay attention whenever you board a plane, crack open a beer or enjoy a sandwich; you may be in the presence of the products of Embraer, Bimbo or AB InBev — global innovators born in Latin America. © Copyright Latin Trade Group

Blanca Treviño, the 2004 BRAVO Technology Leader of the Year, is president and CEO of Mexicobased outsourcing provider Softtek.

BIMBO BLANCO BREAD: GRUPO BIMBO; HAVAIANAS: ALPARGATAS USA

BY BLANCA TREVIÑO

THE CONTRARIAN Fear Not Despot nor Devaluation But Do Fear Your Rival Having proved its economic mettle in the aftermath of the financial crisis, Latin America faces healthy prospects in 2011 and 2012. The threat of sudden devaluation, be it at the hands of external economic shock or political instability, is no longer a priority risk in Latin America, save perhaps Venezuela and Ecuador, with their managed currencies and elevated political risk. Latin American economies and currencies are generally well-managed with increasingly independent central banks and decent fiscal discipline. Hefty foreign reserves held by the region’s larger economies combined with diverse capital inflows, reliable remittance flows and strong commodity exports all provide a solid underpinning to currencies. Even the political pendulum appears to have found a centrist equilibrium that is by and large business friendly, as long as business brings patience and deep pockets to its ventures. With such a rosy macroeconomic and political backdrop, a business investor might ask: Why aren’t we present in Latin America? It is a question resonating in business boardrooms around the world, and companies are clamoring to enter Latin American markets, particularly Brazil. But has risk in Latin America lessened or simply changed its form? The onslaught of new entrants into Brazil, Colombia and Peru immediately drives up the cost of doing business in those jurisdictions. Valuation multiples of acquisitions made in these and other markets now approach those paid for similar industries in the United States and Europe. The cost of recruiting multilingual, worldly and well-educated management has skyrocketed. The president of a $500 million operation in Brazil commands more money than his counterpart in the United States. Commercial real-estate prices in Sao Paulo and Rio de Janeiro have ballooned and are on par with many Western European capitals. At the same time, more supplier options to buyers in Latin America helps lower the cost of goods. Clearly, competitive pressures are growing on both sides of the financial ledger for companies

LATIN TRADE

05-06/2011

operating in Latin America. Foreign companies, used to competing in crowded markets like Germany, the United States or Japan, might welcome a competitive environment where their well-tested products and business models can shine. But competition in Latin America is not always found on a level playing field. Local competitors can turn to a series of advantages to help them under-price or out-maneuver foreign companies, even those Commercial real-estate prices in São Paulo, above, and with a long history of operatRio de Janeiro have ballooned and are now on par with ing in the region. First and many Western European capitals. Adding to the cost of doforemost, local companies are ing business in Brazil and other Latin American nations is not held to the same scruthe expense of recruiting management, John Price writes. tiny or legal liability as North know how to operate quite deftly in their own American or European firms markets. But those same companies are not when it comes to bidding on public projects. prepared or inclined to play the game in a Both nepotistic and corrupt practices are comforeign market for fear of legal retribution by monplace in Latin American public sector bids, often at seemingly innocent levels but still their host country. Latin American businesses have a legacy out of reach to highly supervised foreign supof great returns in their home markets. As the pliers and their agents. macro-economic environment in the region Some local companies evade the full reach improves and while European and U.S. markets of regulations and, by doing so, save costs that wallow in malaise, Latin America will continue help them compete on pricing. In most Latin to attract throngs of new competitors. Proud American jurisdictions, labor laws are onerous family-run conglomerates (and long established and can double the full cost of an employee foreign interests) that have enjoyed decades of above his salary. Forcing employees to renew temporary contracts every three months, paying privilege and profit will not shrivel at the arrival of well-capitalized competition. They will dig staff off the books, paying managers outside of in their heels and use whatever weaponry they the country, subcontracting illegally and bribhave at their disposal to defend their turf. As ing unions are all examples of methods used to always, the better-prepared will win. shave 10 to 30 percent off of labor costs. Some competitors further save costs by avoiding full compliance with environmental, John Price is the managhealth and safety, training and tax regulations, ing director of Americas which can provide a further 5 to 15 percent Market Intelligence and cost advantage over fully compliant competia 20-year veteran of tors. Local companies have been known to Latin American comcall upon political favors to help dissuade petitive intelligence and a new entrant from investing or pursuing a strategy consulting. particular operating license. These tactics are jprice@americasmi.com well-known to many foreign operators who

PHOTO COURTESY OF EMBRATUR

BY JOHN PRICE

THE BOTTOM LINE

The Chilean Miracle I don’t know why I recently recalled a documentary about Chilean society that I had seen many years ago on television. Perhaps it was the images of the tsunami in Japan, ones that I associated in my mind with the videos of the tsunami in Concepción from a year ago. It may also have been the comparison between the stoicism that the Japanese have demonstrated in this trag-

edy and the relative calm that the Chileans have shown in the face of adversity. In any case, the documentary focused primarily on how Chilean society has evolved since the Spanish conquest under Valdivia, leading into a discussion of the election of Allende, the era of rightist repression, and finally the economic and social miracle that Chile today so clearly exemplifies. The most interesting part of the documentary was an open, impromptu discussion among a group of public high school students in Santiago de Chile. The teacher

LATIN TRADE

05-06/2011

moderated the discussion, and students expressed with great passion their views on politics, society, the economy and the future of the country in general. Foremost among the students’ comments were the typical Latin American speeches about how exploitation by the elite necessitates the immediate redistribution of income, about how poverty is unequivocally the source of all violence, etcetera, etcetera. I recall, however, a special young man who impressed me. When it was his turn to weigh in, this teenager rose from his chair and said something like this: “And where does this leave the businessman in the midst of all this tragedy? Is it not the owner of the company Santiago, Chile who gives us the chance to work? What happens to the company if the owner does not return to oversee the process?” In my opinion, the greatest achievement in Chile’s socio-economic history has been to raise the status of entrepreneurs in society. This social and cultural development has become a virtuous circle. The fact that people respect and admire enterprise increases the interest of this young man in making the right decisions to create a company in the future. In Chile, the creator of a company tends to have greater “status” than an employee. This is controversial. But it is true.

The most important person in society is the entrepreneur. Like it or not, the entrepreneur supports the consumption by other people in society. Admiration for enterprise is the reason why, when you take a hotel taxi from Santiago de Chile’s El Golf district and travel along Calle Apoquindo in the direction of the mountains, after just a few blocks you arrive at a new office park in the city. A park where easily 50 towers are under construction, including the new headquarters for LAN, one of the world’s most profitable airlines. Around the next bend in the road, you enter a highway that rivals the best in Germany. Within five minutes, the taxi has plunged into a several-kilometer-long tunnel that crosses the city from one side to the other. The ride to the airport takes about 20 minutes. This does not seem like Chile. It’s like Switzerland. This beautiful story is a function of the Chilean miracle. A miracle that generates entrepreneurs who pay taxes. And a miracle that produced leaders such as former President Ricardo Lagos, who 11 years ago at a conference in New York said: “My goal as the leader of Chile is to make sure that every child in my country has the option and ability, if he desires it, to become the world’s next Bill Gates.” What a delightful message! And what a pity that half of the continent still does not understand it. Alberto J. Bernal-León is head of research at Bulltick Capital Markets. Follow him on Twitter @AlbertoBernalLe.

SANTIAGO, CHILE: COURTESY OF PROCHILE

BY ALBERTO J. BERNAL-LEÓN

SPECIAL ADVERTISING FEATURE

Christophe Colomb discovers time

Inspired by the same spirit of discovery that reached new continents, Manufacture ZENITH launches the Christophe Colomb, a new wristwatch committed to the ideals of creativity, invention and daring that drove Christopher Columbus to brave the unknown. The Christophe Colomb now ventures to answer the question that haunted those fearless seafarers: how to achieve precision measurements with instruments that are subjected to constant motion. Those long-ago explorers contrived to balance the ship’s compass on a “Cardan suspension,” a series of gimbals that enabled it to compensate for the ship’s pitching and rolling on the waves. ZENITH engineers have reformulated this concept, which permanently changed the history of marine chronometers, with a radical innovation that promises to revolutionize the watch industry. With the same passion that drove the Genovese seafarer, Manufacture ZENITH has discovered a new way to measure time: the Christophe Colomb is the first watch to successfully cancel the effects of gravity, instead of merely compensating for it, as the tourbillon complication does.

This innovation is made possible by its unique gyroscopic system that ensures perfect horizontal positioning of the regulating organ. This complex system freely rotates 360˚ and comprises 166 components. The timepiece is hand-wound, 45-jewel, 36,000 VpH, Academy 8804, with a 50-hour power reserve. Its 45mm-diameter case comes in a choice of yellow, rose or white gold and is fitted with cambered glareproofed sapphire crystals on both sides. The gyroscopic system is protected by its own sapphire crystal “dome.” The rose gold dial is adorned with a barleycorn guilloché motif, with the hour and minute subdial in the upper portion, and the gyroscopic cage showcased in the lower portion. The seconds subdial is located on the left and the power reserve on the right. This magnificent model features a crocodile leather strap and 18-carat gold triple folding clasp. The Christophe Colomb is produced in a limited edition of 25 pieces. The inexhaustible determination of Manufacture ZENITH, filled with the same spirit of discovery that inspired this watch, quite literally aims to rediscover time itself.

PEOPLE

There’s no menu or formula for success.” German Efromovich German Efromovich has gone from humble origins to leading a multibillion-dollar empire that is heating up Latin America’s aviation sector.

LATIN TRADE 05-06/2011

PEOPLE

EFROMOVICH: Hardworking Visionary Avianca Chairman German Efromovich talks to Latin Trade about his vision and future plans.

PHOTO: PAULO FRIDMAN FOR LATIN TRADE

BY JOACHIM BAMRUD PHOTO BY PAULO FRIDMAN

SÃO PAULO – As planes take off and land right outside his transit office next to the Congonhas airport in the middle of São Paulo, German Efromovich eagerly talks about what drives him most: “I love being in contact with people,” he tells Latin Trade. “At the [airline] counter, the person comes to check their suitcase. Whenever they have a problem, a genuine problem, it gives me great satisfaction when I can make them happy.” He can happily spend hours at an airport, getting to know people and different cultures. Customers and staff alike at Colombian flagship carrier Avianca are getting used to seeing Efromovich at the El Dorado airport in Bogota, stepping in to board people or at other parts of the operation. Combine that with a keen sense of business opportunities and risk taking, and you have the key ingredients behind the success at Avianca, which he acquired in 2004. When the Efromovich family bought the airline, it was a mess, bleeding money and suffering from a bad reputation among its customers. In 2003 the once-proud airline — the first on the American continent — filed for bankruptcy. Buyers weren’t exactly standing in line, and the airline’s future was highly uncertain. Efromovich surprised many when he bid for the company. He paid $64 million for a majority stake and later bought the whole company. At the time, many observers thought he was taking a major risk. “He sees opportunities where others only see crisis,” says Fabio Villegas, CEO of Avianca and its holding company, AviancaTACA. The gamble paid off. Today, the 92-year-old Avianca reports healthy profits, is expanding beyond its borders and is hugely popular

among both customers and its employees. Its future as the world’s second-oldest airline in continuous operations is secure. (KLM was founded two months before Avianca.) Avianca has Latin America’s best food and beverage service and on-time performance, according to this magazine’s latest reader survey among business travelers in Latin America. “The Latin Trade survey [shows that] if people like good food, you have to find them good food,” Efromovich says. Meanwhile, morale among employees at Avianca has dramatically improved. Executives such as Villegas say they most value Efromovich’s personal touch, his accessibility and the confidence he instills. Efromovich’s turnaround of Avianca has earned him widespread praise among Colombians at all levels. He was named Businessman of the Year in 2009 by Colombian business newspaper La Republica and receives lavish praise from people such as former president Alvaro Uribe. “German Efromovich is a great person and on that basis a formidable businessman,” Uribe tells Latin Trade. “For Colombia it has been a blessing to count on German Efromovich as a businessman and as a human being. … He’s an example to follow for the new generations.” Maria Elvira Pombo, Colombia’s ambassador to Brazil and a former head of Colombia’s investment agency ProExport, also is a big admirer. “German Efromovich’s impact in Colombia can be seen in different areas — from the job creation that the expansion of his business generated to the recovered confidence among Colombians in what was a national symbol.”

05-06/2011 LATIN TRADE

PEOPLE

THE NUMBERS AviancaTACA reached revenues of $3.1 billion and a net income of $50 million last year. The revenue figure represents a 19.2 percent increase from the combined revenues of Avianca and TACA in 2009 and twice the sales they had in 2005. The number of passengers went from 11.6 million in 2005 to 17 million last year. In April, AviancaTACA raised $250 million in a successful IPO on the Bogota Stock Exchange. Demand was five times higher, giving the company good reason to be bullish on future share issues. This year, the company estimates revenues of $3.5 billion and a net income of $165 million. However, it believes it can sustain even stronger growth the next four years after that. In 2015, AviancaTACA should see revenues of $5.7 billion and a net income of $438 million, it predicts. Part of the reason is a diversification of revenues by segment and country markets. While non-passenger revenues (mainly from cargo) currently account for 14.5 percent of revenues, AviancaTACA plans to boost non-passenger revenues to an 18.4 percent share. Meanwhile, it plans to boost market share and the number of destinations in North America and South America, strengthen its routes to Europe and boost domestic traffic in markets such as Peru and Ecuador. Last, but not least, the company will continue investing in new planes. It plans to acquire 50 new aircraft over the next four years

and an additional eight after 2015. The improved numbers at AviancaTACA also are good news for Synergy Group. Efromovich expects the group to go from $3.5 billion in revenues in 2010 to $5 billion this year as a result of rising oil prices, growing demand for shipbuilding and AviancaTACA’s growth. Last year’s results were an improvement over 2009 thanks to the AviancaTACA merger, while the rest of the businesses were stable. The result is more competition for LATAM. Experts believe LATAM and AviancaTACA will be the two dominant players in the Latin American aviation market over the next few years. “They both have the right approach and are strong throughout the region and will be even more so as they develop their joint venture and expand throughout the region,” says Bob Booth, chairman of U.S.-based consultancy AvGroup Inc. Ronald Pantin, CEO of Colombia’s fast-growing oil producer Pacific Rubiales, goes one step further: “We have seen the transformation of Avianca into a great airline, [and] I am sure that AviancaTACA will be the most important airline in Latin America,” he says.

BROAD EMPIRE However, Avianca is not the only airline Efromovich runs. AviancaTACA includes TACA airlines and its units Lacsa in Costa Rica and TACA Peru. It also includes smaller airlines that serve domestic routes, such as Aeroperlas in Panama, Isleña in Honduras and Aerotaxis La Costeña in Nicaragua. Meanwhile, his Synergy Group (which controls AviancaTACA) also owns Colombian carriers SAM and TAMPA. And OceanAir in Brazil has been rebranded Avianca Brasil. Synergy Aerospace (the holding company for Synergy’s majority shares of AviancaTACA) also runs Colombian-based Helicol-PAS (which operates a helicopter and small aircraft service) as well as other companies that offer helicopter service, air taxi service, aircraft and private jet maintenance. Although the holding company uses the name AviancaTACA and its units use several brands, Efromovich doesn’t rule out that Avianca may be used as the sole brand in the future. Contrary to media reports, Efromovich did not invest in the Mexicana airline in Mexico. “We looked at it [but] didn’t even reach a memorandum of understanding,” he says. OceanAir did fly to Mexico at one point, but had to stop because of the market conditions. Efromovich doesn’t rule out that he will re-enter Mexico at some point. Avianca Chairman “You can never say that you are not interested in German Efromovich helping board a market,” he says. passengers at Meanwhile, Synergy also is involved in various El Dorado airport other businesses, including oil, shipbuilding in Bogota. and technical inspections, radiochemistry, radiopharmaceuticals, agriculture and hospitality.

LATIN TRADE 05-06/2011

PHOTO: SANTIAGO GUTIERREZ-VIANA/DINERO.COM

Efromovich’s merger of Avianca with El Salvador-based TACA airlines helped stir up the aviation sector in Latin America. The merger, announced in 2009 and implemented in February 2010 after regulatory approvals, will provide cost savings of more than $214 million during its first two years. Today, the Avianca group is clearly seen as the top rival for the new LATAM holding of Chile’s LAN and Brazil’s TAM (which is pending approval).

PEOPLE

Yet airlines are clearly Efromovich’s passion. Latin Trade counted more than 20 model airplanes in his São Paulo office. “The least lucrative [business, but] the one that I am most passionate about is aviation,” he says. British mogul Richard Branson once famously was asked how to become a millionaire. Easy, he said. You start by being a billionaire, and then you buy an airline. “Branson is absolutely right,” Efromovich says.

PHOTO: AVIANCA

Avianca CEO Fabio Villegas and Avianca Chairman THE OIL FACTOR German Efromovich have The rising oil prices have been a mixed blessing reason to smile as they for Efromovich. While oil prices go up, he benefits board a plane at El Dorado as an oil investor, but hurts as an airline investor. airport in Bogota. Avianca “It’s the perfect hedge,” he jokes, before adding, has left the dark days of “Extremes are not good.” bankruptcy and is now High peaks and cycles of high and low prices expanding significantly throughout Latin America. are not good in general. The key is that all his businesses are profitable, Efromovich says. He defines prices above the high $90s a barrel as a “red adds a third factor: “He can provide insight on both the operating zone” even for oil producers themselves. details and the strategic issues of a company,” he says. In addition to his oil services business, Efromovich was one of the Another key characteristic is his passion. first investors in Pacific Rubiales and remains a board member today. “German Efromovich transmits passion for his work,” Pombo “Pacific Rubiales ... has a bright future and a first-class management says. team,” he says. Within the next 30 years, he predicts, it could become Efromovich acknowledges that hard work is part of the reason the next Exxon Mobil. “They meet all the requirements to do so.” for his success. “There’s no menu or formula for success,” he says. In addition to Pantin, a Venezuelan who once worked at “I think it’s a combination of many [factors], including persistence, Venezuela’s state oil giant PDVSA, Pacific Rubiales’ management passion, loving what you do and work, work, work.” team also includes other former PDVSA executives who left when Meanwhile, he also acknowledges that his focus on service has the firm became politicized under President Hugo Chávez. been key to Avianca’s success. His ideal is Asia, where people believe “It’s a pity for Venezuela,” Efromovich says. “The greatest capital that serving is both a duty and a pleasure. Latin Americans in a country has is not its currency, but its people. It’s a pity that general have a service mentality and especially so Colombians, he Venezuela has lost a great deal of talent, not only in oil.” points out. “That helped a lot in the case of Avianca,” Efromovich Venezuela has Latin America’s highest level of brain drain and says. However, what the staff needed was someone who could end also is one of the worst worldwide, according to a Latin Business the uncertainty and help them look forward, he adds. Chronicle analysis of an executive opinion survey from the World In contrast, the United States lags when it comes to airline Economic Forum. service, he says. “I think the United States lost its sense of service,” Efromovich says. U.S. airlines have “become so crowded, it’s like HARD WORK AND A VISION riding a bus.” Among the key words that come up again and again by those who know Efromovich is that he is a hard worker with attention to SOLID TEAM details and a passionate visionary. Efromovich’s success also was built by surrounding himself with “I would emphasize that he has vision, and to bring that to reality widely respected people. he’s a tireless worker that doesn’t forget any details,” Uribe says. Pombo agrees: “He’s a visionary and pragmatic person with clear Villegas, who was hired as CEO of Avianca in 2005, is a former objectives,” she says. “His knowledge of the business allows him to managing director for the Colombia operations of Deutsche Bank adjust his actions on a permanent basis without losing the sight of and the Rothschild Group. He headed up Colombia’s financial those objectives. He has a long-term vision that allows him to be services association ANIF, served as advisor to the Luis Carlos flexible. He’s disciplined [and] has a huge capacity for work. He’s an Sarmiento Angulo Organization (owner of Grupo Aval) and also exceptional human being that imprints on his companies a value of served in public-sector roles, including as interior minister, secretary social responsibility that benefits the country.” general to then-president Cesar Gaviria and ambassador to the Pantin also singles out Efromovich’s hard work and vision and Organization of American States.

05-06/2011 LATIN TRADE

PEOPLE Another key executive is Alexander Bialer, a Brazilian native and longtime executive at GE Brazil who serves on the board of AviancaTACA as well as companies such as Sabesp (Brazil’s largest water company), Brazilian industrial manufacturer Romi and Pacific Rubiales. Meanwhile, Alvaro Jaramillo — a former president of Avianca and Colombia’s top bank, Bancolombia — is one of the six independent members of the 11-member board of AviancaTACA. Efromovich also counts on help from his brother Jose, who is president of Synergy Aerospace. They have been partners for more than three decades, he says.

him with the former president in his São Paulo office. Governments do some things well and some things badly, he says. In Lula’s case, there were more things good than bad. “We’re doing well,” Efromovich says about Brazil’s economy, which last year grew at 7.5 percent, its best result in 24 years. Efromovich also is pleased with Lula’s successor, who assumed Brazil’s presidency in January. “I believe President Dilma [Rousseff ] is doing very well and taking advantage of the legacy that [Lula] left,” he says. However, he does complain about Brazil’s infrastructure. “We have to modernize faster,” Efromovich says.

UNIQUE BACKGROUND Efromovich is not your typical airline executive. In fact, his foray into aviation happened by accident. “A client owed us money and paid with an airplane,” he says. “That airplane transformed into 180 airplanes.” Efromovich’s personal background is unique. He was born in Bolivia to Polish immigrant parents, raised in Chile and then in Brazil, where he arrived when he was 14 years old. He earned a degree in mechanical engineering from FEI

DIFFERENT STYLE Efromovich’s style is different than most executives in the airline industry, where characteristics like smooth and polished dominate. Efromovich is neither. He answers questions directly. “Who said we wanted to enter the airline business?” he replies when we ask him why he entered the sector. More often than not, he is seen without a tie, and he acknowledges that he would rather be helping airline passengers at the airport than dealing with investors or government bureaucrats.

“German Efromovich is a great person and on that basis a formidable businessman.” Alvaro Uribe, former president of Colombia University in Brazil. His career includes selling encyclopedias, dubbing Mexican movies into Portuguese and teaching. However, the oil sector laid the foundation for what evolved into the Synergy Group. “The story of his life has been the intense struggle for a victory that was achieved through hard work and talent,” Uribe says. “He’s an example of push and innovation.” It was Uribe who, in November 2005, presented Efromovich with his formal documents of nationalization, making him a dual Brazilian and Colombian citizen. “I am Latin American, Colombian-Brazilian,” Efromovich says. What explains Efromovich’s love for Colombia? “As he himself has stated, Colombia is a country with opportunities for business,” Villegas says. “Parallel with that is the quality of human resources. The commitment by people to follow through on what they are expected to do. All of that has created an infinite wavelength with both his business and personal goals. I believe these are the elements that explain German Efromovich’s strong identification with Colombia.” LULA AND DILMA Efromovich’s teaching job was at an adult school, where in the 1980s he taught a union leader named Luiz Inácio Lula da Silva, who later became one of Brazil’s most popular presidents. “He was a good student,” Efromovich says. “It is an honor for me that he became president.” He praises Lula’s eight-year administration and keeps a photo of

LATIN TRADE 05-06/2011

“His simple work style and clear dedication to improve the attention to service in one of his companies [Avianca], in large part through the example of his own work, has made Colombians feel important,” Pombo says. Efromovich’s office has a fantastic view of the Congonhas airport, but it is surprisingly small for someone running a fast-growing empire. But that’s OK. He spends most of his time these days in Colombia or on the road. Key to his energy is a combination of good sleep and the fact that he loves his work. “I sleep well,” he says. “I have a good conscience.” So what drives him to get up in the morning? “That another day beckons,” he says. “To do business … creating and looking for challenges.” Despite his hectic agenda, Efromovich doesn’t feel the need to recharge his batteries. “First of all, it’s difficult to say that I’m working,” he says. “I don’t work. I do what I enjoy, not what I have to do. I do my hobby.” But when he doesn’t do his “hobby” or sleep, he enjoys spending time with his grandchildren, he says. Meanwhile, Efromovich is expected to continue putting his mark on Latin America’s business. “Without doubt, German is a leader with capacity to reinvent himself to be at the top of each situation, large or small, which you need to on a permanent basis in the world of business,” Villegas says.

editorial@latintrade.com

INDUSTRY REPORT: WIRELESS

MARKET HEATING UP: Mobile customers in Costa Rica, like this woman in downtown San JosĂŠ, will have choices when new providers launch service.

LATIN TRADE 05-06/2011

INDUSTRY REPORT: WIRELESS

Latin America’s

Wireless Boom

Latin America’s wireless sector, the world’s fastest-growing, is expected to expand even more, partly spurred by smartphones. BY ADAM WILLIAMS AND LISA K. WING PHOTO BY JUAN CARLOS ULATE SAN JOSE — As Costa Rica’s state telecom provider prepares to face competition for the first time in its 62-year history, the company known as ICE has amped up marketing and customer service like never before. From January to March, customers who bought a new wireless phone, prepaid plan or service package were entered into a raffle for tickets to a Shakira concert or to an international soccer match at the new National Stadium in San José. ICE also recently offered free phone upgrades to the 3,000 subscribers across the country who were still relying on older models with outdated TDMA technology and it constructed service centers in rural areas. Driving these promotional efforts is the looming arrival of two deep-pocketed multinationals who are Latin America’s top panregional wireless operators. Although the passage of the Central American Free Trade Agreement (CAFTA) in September 2009 eliminated, at least on paper, ICE’s monopoly over cellular service, the move to an open market was slowed by debate over industry guidelines and by bureaucratic delays.

05-06/2011 LATIN TRADE

INDUSTRY REPORT: WIRELESS

In September of this year, two years after CAFTA was adopted, the last staterun wireless monopoly in Central America will finally come to an end when Mexicobased América Móvil and Spain’s Telefónica launch service in Costa Rica. Market observers predict a radical transformation of the industry in this nation of 4.6 million people. Pyramid Research, the Cambridge, Massachusetts-based specialist in the telecommunications industry, estimates that ICE could lose as much as 75 percent of its market share by 2015. An estimated 3 million Costa Ricans currently have cellular service from ICE.

“Costa Rica is a small market, and about 65 to 70 percent of the people in the country already have service plans with ICE,” says Carlos Gallegos, telecommunications director of the consulting firm Deloitte in Costa Rica. “The challenge for the incoming companies will be finding new users or taking current users from ICE. This market has already been penetrated, so I think getting users to switch to new providers will be a challenge, even for the big companies that are entering the market.” Yet some consumers are eager for options. Service from ICE has its flaws.

“In soccer terms, this will be like a game between one of the world’s best teams, like Brazil or Spain, against a high school team.” Juan Manuel Campos, a lawyer with the telecommunications law firm Ciber-Regulación Consultores, on the upcoming wireless competition in Costa Rica “In soccer terms, this will be like a game between one of the world’s best teams, like Brazil or Spain, against a high school team,” says Juan Manuel Campos, a lawyer with the telecommunications law firm CiberRegulación Consultores. “ICE has never had to compete for users in its own market. Learning how to thrive in a competitive market will be an entirely new challenge for them. Telefónica and América Móvil, on the other hand, are already competing — and dominating — markets in Latin America. They already have strategies in place for penetrating markets and know how to gain market share. They should have no problem doing so in Costa Rica.” América Móvil has committed to invest $77 million in infrastructure and market development in Costa Rica; Telefónica has promised to spend $95 million. In early March, both companies had begun construction on customer-service centers throughout the capital. But not everyone is convinced that ICE will suffer a dramatic fall from grace. Given its dominant market-share position, some people think ICE will be tough to topple. It also offers fixed-line and Internet services.

LATIN TRADE 05-06/2011

Every few weeks, coverage will fail. National text messaging sometimes is not available for three-hour stretches. Costa Ricans will receive the “same high level of service that has resulted in … [millions of ] Latin American users,” says Ricardo Taylor, executive director of América Móvil in Costa Rica. As of December, 2010, América Móvil boasted a total of 207.3 million wireless subscribers in Latin America. ICE might serve a base that is just 1 percent the size of América Móvil’s panregional one, yet the company’s president, Eduardo Doryan, says the company is up to the challenge. “Our goal is to maintain as much market share as we can, and we have prepared a strategy that will allow us to do so,” he says. “We have no fear of the competition. The market has space for one and for all. They will have their clients, and we will have ours. … But I can assure [you] that we will defend our revenue with all of our strength, and that we fully expect to remain the primary telecommunications company in Costa Rica.” Meanwhile, no one disputes that the companies that manufacture the wireless handsets will be big winners from the heated competition.

“We will enter Costa Rica strongly,” says Teofilio Palacios, vice president for Latin American Telecom Operations at Koreabased Samsung Electronics, the world’s second-largest wireless phone producer. Part of his optimism stems from the fact that the company has a strong brand name from other products. “We already have a presence there with other Samsung products,” Palacios says. The competition in Costa Rica is expected to bring the country in tune with the rest of Latin America, which has seen a dramatic increase in wireless phone sales and subscriptions over the past decade. Thanks to the monopoly of ICE, Costa Rica has long been a regional laggard in wireless. Its penetration rate is higher than only Cuba and Haiti in Latin America, and it is lower than its poorer neighbor Nicaragua, according to the Latin Technology Index from Latin Business Chronicle. In the 2005-09 period, Costa Rica posted the second-lowest growth in wireless subscriptions in Latin America. Only Chile — which has long been a highly competitive and saturated market — posted a smaller increase, according to a Latin Business Chronicle analysis of data from the International Telecommunications Union (ITU). BRAZIL: RISING TIDE Data services are driving top-line growth in Brazil, where the leading providers are Telefonica subsidiary Vivo; Claro; TIM, a division of Telecom Italia; and locally owned Oi, in which PT Telecom owns a stake. “All the companies indicate that the income from data will become more important,” says Luis Fernando Azevedo, a telecom analyst with Bradesco. “Vivo currently has around 20 percent in data. We think they will surpass 30 percent by 2013. TIM is at around 12 percent and should go to 20 percent over the next three years.” Although analyst Alex Padellas, who covers telecoms at Banif bank, agrees that demand for data services will grow, he cautions that it is starting from a low base. “For demand for these things [data, music, videos and Internet] to increase significantly, you need to have a rise in incomes,” he says. The mobile providers are nonetheless

INDUSTRY REPORT: WIRELESS

investing in their 3G coverage and capacity, which will support more consumer usage of smartphones, mini-models, notebooks and tablets, Bradesco’s Azevedo says. He also predicts that prices of voice services will come down. “Minutes will be cheaper. Smartphones will be cheaper and more accessible,” he says. “And as the companies invest, the services will get cheaper. SMS [texting] services are already growing, and you have more applications for that.” Renata Gammarano, a bank employee in São Paulo, exemplifies the trend. She uses an iPhone. “I am totally addicted. It’s like my child,” she readily admits. “I wouldn’t dream of getting any other kind of phone.” The iPhone design and iPod music function were determining factors in Gammarano’s December 2009 purchase, but now she uses her smartphone for e-mail and to go online, principally to Facebook. She uses the Skype function and sends a lot of text messages. Gammarano upgraded to the latest model, an iPhone 4, in December. “It really is the best,” she says. Brazil had 203 million mobile lines at the end of 2010, representing an astonishing penetration rate of 105 percent, according to Padellas, who estimates that the number will rise to 215 million by year-end 2011. “There are more lines than people

because one person has two or three or four lines,” he says. “If he wants to talk to someone with a TIM, he puts a TIM chip in his phone, and TIM to TIM is free. And then if he wants to talk to someone with Vivo, then he’ll put a Vivo chip in because it might have an offer on. That’s why the penetration is so high. Otherwise, it would be 30 to 40 percent.” With Brazil’s upper classes oversubscribed, new wireless customers are coming from the lower economic strata, and they favor prepaid services, which account for 82.3 percent of all mobile accounts, Padellas says. He expects the ratio of pre-paid to contracts to remain constant. “If anything, the prepaid numbers will rise a little towards around 85 percent, in my opinion,” he says. An already-heated market will become more competitive in 2011, says Padellas, who expects Oi to be more aggressive. Another factor: Nextel. “Nextel was in the radio segment, but it will start operating in the 3G wireless segment, and that’s another reason that competition will be fierce,” he says. However, other experts disagree. “Telefonica’s purchase of Vivo, already the largest operator, will make it the dominating carrier,” says Paola Soriano, an IDC senior analyst on Latin America

SMARTPHONES EXPLODE Annual shipments to Latin America, in millions

UNITS

2010

2011

2012

2013

2014

mobile devices. Telefonica paid Portugual Telecom 7.5 billion euros (U.S. $9.8 billion) last year for the 50 percent stake it didn’t already own in Vivo. PERU: JOCKEYING FOR POSITION With mobile phone penetration in Peru expected to reach 100 percent this year, the country’s top wireless operators are spearheading efforts to improve their service and diversify their offerings in order to capture new clients — and retain their current ones. “Although voice is still our core business, data traffic is growing at an impressive pace,” says Rodrigo Arosemena, commercial director for América Movil, owner of the Claro brand. “At our points of sale, the first thing people ask is, ‘How can I migrate to a smartphone?’ ” Industry experts say the growing popularity of smartphones among Peruvian mobile users is a confirmation of a trend away from voice-only use of the phones — a trend that can be observed elsewhere in the region and around the world. With this in mind, Peru’s three wireless operators — Telefónica (with about 60 percent market share), América Móvil (with about 35 percent market share) and Nextel (with about 4 percent market share) — hope to lure customers by offering additional products and services related primarily to data transfer, Internet and e-mail access, instant messaging, ring tones, social websites and other content. “Complements to voice communication are all the rage,” says Arosemena, who notes that mobile Internet access and the use of USB 3G modems among subscribers are on the rise. With a more demanding customers base — and a robust economy — competition among Peru’s wireless operators over the next couple of years is expected to remain strong. The number of subscribers reached 27 million in 2010, a 20 percent increase over 2009. The customer base is expected to continue to post annual growth in the double digits for the next few years.

Source: IDC

05-06/2011 LATIN TRADE

INDUSTRY REPORT: WIRELESS “Mobile density on average surpasses the 100 percent mark, but there still exist regions with less than 70 percent density and some poorer ones with less than 30 percent. We will focus on extending coverage in those areas,” says Alvaro Valdez, director of corporate communications and image at Telefónica del Perú. “In the more developed markets like the main cities, growth will basically be driven by mobile Internet services, smartphones and valueadded services.” Indeed, smartphone sales in Peru are skyrocketing. The number of smartphones in the market is expected to grow 100 percent within the next two years, according to Telefónica’s Valdez. The typical mobile phone user will continue to look more and more like selfproclaimed tech geek Michelle Allemant, a 34-year-old marketing executive who uses her Apple handset mainly for data and less and less for talking. “I’m on one of the cheapest plans because I barely make calls from my iPhone. I prefer texting my friends or sending them an e-mail — it’s quicker, cheaper and less intrusive,” says Allemant, who has been a Claro subscriber for more than five years. “Most of my friends either have iPhones or BlackBerrys. I can’t imagine anyone carrying anything else.” At Claro, more than half of all the new phone lines the company sells to its postpay clients are with smartphones. In an effort to tap into the prepaid customer base — where smartphone use is comparably low — Claro recently launched an offer in which prepaid subscribers can access 10 megabytes for 1 sole a day, or about 27 U.S. cents. Telefónica, on the other hand, is launching its new Movistar Prime handset during the second trimester of this year. The device, which will use the Android operating system, will be the company’s star product in its self-branded smartphone catalog Alvarez says. To keep up with consumers’ changing habits and emerging technologies, wireless operators in Peru will continue to invest heavily in infrastructure, mostly increased backhaul capacity over fiber optic and other technologies. Telefónica, for example, is investing

LATIN TRADE 05-06/2011

more than $1.5 billion in the 2010-2013 period to upgrade its network, which includes, among other things, 1,200 kilometers of fiber-optic lines. As Claro’s Arosemena points out, “More than just a fad, mobile phones have become a necessity, a working tool at all socioeconomic levels.” MEXICO: BATTLE OF THE TITANS Although América Móvil’s Telcel unit has long dominated the wireless sector in Mexico, it is now expected to face more competition from a joint venture between local media giant Televisa and local carrier Iusacell. “Iusacell will be an important alternative to Telcel,” Soriano says. “It will be healthy for the Mexican market.” Televisa announced in April that it planned to buy a 50 percent stake in Iusacell for $1.6 billion. The deal is pending approval by regulators. The expected facedown between Telcel — controlled by Carlos Slim (the world’s richest man) — and Televisa and Iusacell, controlled by moguls Emilio Azcarraga and Ricardo Salinas, respectively, has been dubbed “The Battle of the Titans.” Telcel boasted a 69.1 percent market share in 2010, according to the Competitive Intelligence Unit, a consultancy in Mexico City. The rest of Mexico’s mobile subscribers are divided among three other providers: Movistar, (with a 13.7 percent share);

Nextel (with 11.7 percent) and Iusacell (which also uses the Unefon brand, with a 5.5 percent share). Nextel is a special case. It has the lowest number of subscribers of the four wireless companies but boasts an average revenue per user of 582 pesos, or about $50 a month — more than five times as much as Movistar, which has the lowest average revenue per user. Nextel’s relatively high-earning users are all on monthly plans. Movistar focuses on low-income consumers; about 90 percent of its customers rely on prepaid cards for their service. Rosa María Velázquez, a homemaker and part-time bookkeeper, has long been one of Movistar’s prepaid customers. But she feels pressure from the company to upgrade to a contract. “I’m happy with a prepaid system, but the folks from Movistar have been pressing for me to opt for a plan,” Velázquez says. “It would suit them, no doubt, but it won’t necessarily suit me.” Telcel and Movistar both offer packages in which customers can talk or message with friends on the same mobile network at reduced rates. But there are limitations for the smaller competitor. Telcel has six times as many subscribers, which means Movistar customers have that many fewer potential buddies. “It’s a bit frustrating,” Velázquez says,

WIRELESS BOOM Millions of wireless subscriptions in Latin America SUBS

Source: IDC

Top Markets Ranked by thousands of wireless subscribers in 2009 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Country Brazil Mexico Argentina Colombia Venezuela Peru Guatemala Chile Ecuador Dom. Rep. Honduras El Salvador Bolivia Panama Paraguay Uruguay Haiti Nicaragua Costa Rica Cuba

2009 173,959.4 83,527.9 52,482.8 42,159.6 28,123.6 24,700.4 17,307.5 16,450.2 13,634.8 8,629.8 8,390.8 7,566.2 7,148.4 5,677.1 5,618.6 4,111.6 3,648.0 3,204.4 1,950.3 621.2

Ch.’09/’05 101.8% 77.2% 136.9% 93.0% 125.1% 342.4% 283.7% 55.6% 118.3% 138.2% 554.8% 213.7% 195.2% 224.6% 197.8% 256.0% 629.3% 186.3% 77.1% 358.5%

Sources: International Telecommunications Union, Latin Business Chronicle.

Most Penetrated

SUN/NEWSCOM

Ranked by wireless penetration in 2009 Rank

Country

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Panama Argentina Guatemala El Salvador Uruguay Honduras Ecuador Venezuela Chile Colombia Brazil Paraguay Dom. Rep. Peru Mexico Bolivia Nicaragua Costa Rica Haiti Cuba

Sources: International Telecommunications Union, Latin Business Chronicle.

Penetration 164.4% 128.8% 123.4% 122.8% 113.1% 103.3% 100.1% 98.4% 96.9% 92.3% 89.8% 88.5% 85.5% 84.7% 76.2% 72.5% 55.8% 42.6% 36.4% 4.0%

“but it’s not so much I would want to change operator.” If she were to change, Velázquez, who lives in Texcoco, near Mexico City, could choose from any of the other three. Others have no choice. “I’m stuck with Telcel,” says Cristina Ortega, a small farmer from Nautla in the state of Veracruz. In Nautla, Telcel is the only game in town. Indeed, Telcel has the broadest national coverage of any of the providers, followed by Movistar. “There are places all over Mexico that are covered only by Telcel,” says Carlos García Moreno, chief financial officer of Telcel. “That’s simply because our competitors haven’t invested as much, and we have.” Meanwhile, the wireless service providers are looking to a revenue boost from data services with the advent of cheaper smartphones, tablet computers and other devices that can connect to the Internet. These devices “provide services that only a computer used to have. And most people in Mexico didn’t have a computer,” García says. “The arrival of the smartphones is changing all of that radically. They offer the services of a computer at only a fraction of the cost.” Wing reported from Lima. With additional reporting by Ronald Buchanan in Mexico City and Andrew Downie in São Paulo. editorial@latintrade.com

05-06/2011 LATIN TRADE

INDUSTRY REPORT: WIRELESS

LATIN AMERICA: DOUBLE-DIGIT GROWTH The number of wireless phones in Latin America is growing by double digits. One big winner: Korea’s Samsung. BY JOACHIM BAMRUD

SÃO PAULO — Five years ago, Koreabased Samsung was ranked as the fourth-largest mobile-device vendor in Latin America, with the top spot alternating between Finland-based Nokia and U.S.-based Motorola. Today, Samsung is the second-leading vendor after Nokia, according to market researcher Gartner. Samsung replaced LG Electronics, another Korean company, as the second-leading vendor last year thanks to a 38.5 percent increase. That compares with single-digit growth for Nokia and LG Electronics. And Samsung’s gap with Nokia is narrowing signiﬁcantly. In 2009, Samsung shipped a little more than half as much as Nokia did in Latin America, but last year it shipped only 25 percent less. “Latin America is very important for Samsung because it is an area that is growing fast,” Teoﬁlio Palacios, vice president for Latin American telecom operations at Samsung Electronics, tells Latin Trade during an interview at the company’s Latin America headquarters in São Paulo. According to data from market researcher GFK, Samsung is the market leader in Argentina, Brazil, Chile and Peru in units and also in value. Samsung does not provide Latin America revenue details, but Palacios says growth in the region last year outperformed the company’s global growth. “In 2010, our growth was superior to what we grew worldwide,” he says. Samsung boosted global revenues by 13 percent last year. Meanwhile, global unit shipments grew 19.2 percent, according to Gartner. Brazil, Mexico and Argentina are Samsung’s top markets, but the company is seeing good growth throughout the region. “Countries where GDP grows faster [means] people have more money to spend,” Palacios says. He is particularly encouraged by the high quality of devices being launched in Latin America. Although the region

LATIN TRADE 05-06/2011

was a late comer to 3G — the thirdgeneration wireless telecommunications standard allowing faster transfers of data on mobile devices — it can now fully take advantage of new devices in a way Europe wasn’t able to, Palacios says. Europe was the first region to launch advanced wireless devices, but they failed to garner consumer enthusiasm because networks were not yet ready to provide the appropriate speeds. In contrast, Latin America is moving full speed ahead with 3G this year. All carriers in the region are implementing 3G networks, with the exception of operators in Cuba, Haiti, Guyana and Surinam, market researcher IDC says. It predicts that by 2013, 3G will dominate network connections in Latin America. One advantage for companies such as Samsung is that Latin America has relatively low penetration rates for Wi-Fi and Internet. “Penetration of Wi-Fi is lower than in Europe, the United States or Asia,” Palacios says. “This represents a huge difference.” Meanwhile, the Internet is still underpenetrated because of the relatively high cost of computers for most Latin Americans. “The first way [most] people access the Internet is through a mobile device,” Palacios says. Samsung’s best-selling mobile device in Latin America is the Galaxy 7 tablet PC, but Palacios expects the new Galaxy S2 to be the flagship product once it is launched mid-year. Drivers of demand for the Samsung tablets in Latin America include the health sector, travel industry and commercial sales. In the health sector, users include hospitals and insurance companies. “You can take a picture of accidents and upload immediately,” Palacios says.

DOUBLE-DIGIT GROWTH All in all, 160 million wireless phones were shipped in Latin America last

year, a 28 percent increase from 2009, according to IDC. That was the highest growth rate worldwide. Asia-Pacific, for example, grew 26 percent. The total number of wireless subscriptions in Latin America reached 535.2 million last year, an 8 percent increase from 2009, according to IDC. However, when compared with five years earlier, wireless subscriptions have more than doubled. In the period 2005-09 alone, Brazil saw the number of subscribers grow 101.8 percent, while the number of subscribers in Mexico jumped 77.2 percent and those in Argentina grew by 136.9 percent, according to the Latin Business Chronicle analysis. Peru led growth among the top seven Latin America markets, increasing the number of subscribers by a whopping 342 percent. Meanwhile, Colombia and Venezuela — the fourthand fifth-largest regional markets — posted increases of 93 percent and 125 percent, respectively. Costa Rica’s Central American neighbors also impressed. Guatemala became the seventh-largest market for subscribers in Latin America (ahead of Chile, with a much larger economy), thanks to 284 percent growth in the 2005-09 period. Meanwhile, Honduras, El Salvador and Nicaragua saw growth rates of 555 percent, 214 percent and 186 percent, respectively. América Móvil and Telefónica dominate Latin America’s wireless sector, accounting for 67 percent of all wireless subscribers last year, according to a Latin Business Chronicle analysis of data from the operators and IDC. Those companies also dominate revenues in the sector. Combined, they posted 2010 Latin America wireless sales that were equivalent to half of what the nine largest carriers in the region posted during the year. América Móvil boosted Latin America wireless revenues by 13.7 percent, to

INDUSTRY REPORT: WIRELESS

PHOTO: SAMSUNG

$27.8 billion, and Telefónica saw a 4.9 percent increase, to $20.6 billion. América Móvil operates under the Claro brand in Latin America, except in its home market of Mexico, where it uses Telcel. Telefónica uses the Movistar brand for its wireless business worldwide. However, the market also includes several smaller players that are performing well, including U.S.-based NII Holdings, which owns Nextel brand wireless carriers in ﬁve Latin American nations. NII posted the strongest revenue growth among the top carriers in Latin America last year, according to the Latin Wireless Index from Latin Business Chronicle. NII revenues grew 27.4 percent, to $5.6 billion. This year, Latin America will likely see an 18 percent increase to 189 million wireless units shipped, according to IDC. “The increase will be spurred by smartphones,” says Paola Soriano, an IDC senior analyst on Latin America mobile devices. However, the market also will get a boost from low-priced models introduced by Chinese companies. Globally, China-based ZTE, HTC and Huawei trailed only Apple in Latin American growth last year, according to Gartner. “Penetration in Latin America, which hasn’t been that high, is now growing thanks to the introduction of inexpensive models, especially from China,” Soriano says. The number of wireless subscribers is expected to reach 571.2 million this year and grow to 652.8 million in 2014, IDC predicts.

THE SMARTPHONE BOOM Experts say smartphones are driving much of the growth today and that sales will jump over the next three years. This year alone, the number of smartphones sold in Latin America is expected to double compared with last year – 33 million units versus 18.8 million, IDC estimates. By 2014, smartphone sales will account for 80.6 million units, it predicts. In Brazil, Chile and Argentina, there is growing migration from feature phones to smartphones, Soriano says.

Teoﬁlio Palacios, vice president for Latin American telecom operations, Samsung Electronics

“Operators are promoting [smartphones] at a higher rate,” she says. Smartphones already can cost as little as $150 through Alcatel or Huawei, she adds. However, in Colombia and Peru, the migration is much slower. “We don’t see operators pushing for smartphones as in other countries,” Soriano says. Meanwhile, iPhone sales have been slower than in the United States or Europe, she says. “IPhone has a lot of demand in Latin America, but results are lower than other regions due to the price,” Soriano says. Apart from the cost of a device itself, there also is a limited offer of locally relevant applications at affordable prices. Mexico is the only country with a local iTunes store. Brazil and Mexico led the way in Latin American sales of iPhones last year, according to IDC. “The value for each phone is high, but the volume is very small,” Soriano says. The success of smartphones is key for many operators to boost revenues per user, especially in a region traditionally dominated by prepaid subscribers. Last year, 84 percent of subscribers were prepaid, according to IDC data. However, because of a

combination of factors, postpaid use is picking up. Since 2008, postpaid use has been growing at a faster pace than prepaid, according to IDC. One driver is the increased use of data on wireless phones, especially smartphones. The most economic way to do that is through postpaid packages offered by the carriers. Another is the fact that many consumers are increasingly dropping ﬁxed lines at their homes in favor of wireless phones. Wireless is going from being a complement to ﬁxed lines to replacing them, IDC says. And the most convenient payment method is postpaid, it points out. Despite the growing use of smartphones, experts see continued strong demand for basic phones for a long while. “There’s still a lot of poverty in Latin America,” Soriano says. That means strong demand for the least-expensive models. Meanwhile, the growth of low-cost devices from Alcatel and the Chinese producers is helping drive prices down. “That’s why a lot of people have phones that are even less expensive than they were three years ago,” Soriano says. Meanwhile, executives such as Samsung’s Palacios can continue seeing strong demand for all their devices, independent of price.

05-06/2011 LATIN TRADE

COUNTRY REPORT: MEXICO

Mexico: POSITIVE

BUSINESS OUTLOOK Local and foreign investors are optimistic about Mexico’s business outlook as it comes on the heels of a strong recovery last year. BY DAVID AGREN MEXICO CITY — Business leaders such as José Zozaya, president of the railroad company Kansas City Southern de Mexico and president of the American Chamber of Commerce of Mexico, speak optimistically about growth and investment opportunities in Mexico, especially in sectors such as manufacturing and mining. “There’s a lot of optimism,” Zozaya says about the prevailing business sentiment. Other business executives and national business chambers are also confident.

2011 OUTLOOK This year appears to be shaping up well as Mexico benefits from its proximity to the United States, sound macroeconomic policies and government initiatives to cut red tape — reflected in the Doing Business 2011 survey from the World Bank, in which the country placed first in Latin America (replacing Colombia) and 35th worldwide. The International Monetary Fund estimates GDP growth this year of 4.6 percent for Mexico, a better rate than the fund expects for Brazil. The private-sector projections share a similar sense of optimism. Business group Coparmex projects growth of 4.5 percent in 2011. The GDP forecast, says American Chamber of Commerce chief economist Deborah Riner, “is easily a percentage point above what it was six months ago.” She provided another reason for optimism: the July 2012 presidential vote. Mexico traditionally performs well in election years, Riner says. Other projections are promising, too. The American Chamber of Commerce projects foreign direct investment (FDI) of $22 billion. That would represent an increase of 24.3 percent from last year’s level of $17.3 billion. In 2009, FDI had fallen to $15.2 billion, its lowest level since 2003.

LATIN TRADE 05-06/2011

COUNTRY REPORT: MEXICO

Automobile manufacturing in Mexico, such as at this General Motors plant, experienced a robust rebound in 2010. Although domestic vehicle sales are recovering much more slowly, auto exports were among the factors fueling GDP growth of 5.5 percent last year.

05-06/2011 LATIN TRADE

COUNTRY REPORT: MEXICO

A survey by the recruiting firm Michael Page found 74 percent of the 250 companies questioned had recruitment plans this year, according to its Mexico managing partner Christophe Rosset. Some 52 percent of the firms planned to hire at least 15 staff members, he says. Questions emerged if the growth will be sustained, especially as it is so export-focused and because Mexicans have been slow to increase spending — and abandon the view that the country is mired in the worst economic crisis since the Great Depression. Internal demand has recovered somewhat, but it still lags as consumers complain of rising prices and stagnant wages. “We’re expecting [customer demand] to improve,” says Abelardo Conde, CEO of Burger King Mexico. Brian J. Smith, president of the Mexico Business Unit of Coca-Cola, says the iconic bottler — which draws 11 percent of its worldwide sales from Mexico — saw growth increase by 8 percent in the fourth quarter of 2010. “The company … maintains its commitment to invest in Mexico,” Smith says. On the whole, business interest in Mexico remains strong among German firms, especially in the automotive sector, says Johannes Hauser, managing director of the Mexican-German Chamber of Commerce and Industry. Automotive companies, among others, are attracted by the cost advantages of Mexico, and it offers the benefit of operating in the “dollar zone.” Many of the German automotive and autoparts companies in Mexico “are operating at 100 percent capacity,” Hauser adds. Mining activity has expanded, too, driven by high mineral prices. The sector surpassed both remittances and tourism in terms of economic importance over the past year, says Sergio Almazán, CEO of the Mining Chamber of Mexico. Still, tourism performed well in 2010, with 22.4 million visitors coming to Mexico, an increase of 4.4 percent from 2009 and more than the 22 million who arrived in 2008, the last year before the H1N1 virus scare. Mexico is Latin America’s top tourism market by far, in terms of arrivals and in receipts, too. Last year, receipts from international arrivals reached $11.9 billion, an increase of 5 percent from 2009, according to data from the Mexican Central Bank and the World Tourism Organization.

LATIN TRADE 05-06/2011

2010: STRONG RECOVERY Mexico bounced back in 2010 as the export sector (driven by an especially robust recovery in automobile manufacturing), along with a strong increase in tourism visits and growth in the mining industry, helped produce economic growth of 5.5 percent. That’s the best result in 10 years. The 2010 growth compared favorably with 2009, when the economy contracted by nearly 7 percent as the peso sank, export manufacturing slowed and the H1N1 outbreak scared off tourists. The recovery, says Riner of the American Chamber of Commerce, shows how Mexico’s microeconomic climate has improved over the past 15 years and “broke the link” between inflation and a weakened peso. Several multinationals reported a strong year as well. “Emerson’s business in Mexico had a higher growth rate than [in] any other country in Latin America in 2010,” says Leonardo A. Rodriguez, president of Latin America for U.S.-based Emerson, the world’s largest maker of power equipment for oil companies. Sweden-based Electrolux, the world’s second-largest appliance maker, outsold the market in general, according to its Mexico country manager, Winston Merchor. “In 2010, we significantly improved our customer and distribution portfolio in Mexico and achieved growth rates that were higher than the market,” Merchor says. The health sector also was a growth market for multinationals such as U.S.-based medical-products conglomerate Baxter International. “Baxter Mexico experienced solid performance in 2010 … as the Mexican government sought to continue expanding access to healthcare to its population while effectively managing healthcare costs,” says Wolf Kupatt, the company’s president for Latin America.

CHALLENGES Fewer visits have been made to the border region, but the maquiladora sector has expanded nonetheless. Some challenges remain for the sector that go beyond violence. Bob Cook, president of the El Paso Regional Economic Development Corporation (REDCo), says the maquiladora sector would benefit from legal changes so that companies receiving initial permission for manufacturing can easily begin providing a service component if plans change — and vice versa. Uncertainty over a modified flat tax known as the IETU tax — which is the source of enormous politicking — is another challenge, Cook says. Introduced through a 2007 economic reform, business groups have complained that the tax — which was designed to increase non-oil revenue for the federal government — is cumbersome because it must be calculated along with the more established tax on income (ISR) and the higher amount paid. Coparmex has called for fiscal reform that would eliminate the IETU and provide a single, more straight-forward tax. The organization has called for a labor reform, too, that would improve productivity and make the hiring and firing of employees easier. Lawmakers from the opposition Institutional Revolutionary Party (PRI) have presented reforms on both issues, only to back away from the labor issue, something analysts say was motivated by the gubernatorial race this year in the strategic state of Mexico. Baxter also complains of burdensome import regulations. “Baxter Mexico is also being affected by a complex and burdensome process established by the Comision Federal para la Proteccion Contra Riesgos Sanitarios (COFEPRIS) that restricts our ability to register or import critical medical therapies for patients,” Kupatt says. “We hope this process will be streamlined very soon.”

LATIN BUSINESS

CHRONICLE

News, analysis and statistics available anytime, anywhere

Enterprise Solutions In the ever-evolving and growing landscape of Latin American business, staying in the loop requires effective and timely communications. The Latin Business Chronicle Enterprise Solution allows your entire organization to receive our daily and weekly news service as well as full access to our website. Whether in the office or on the go, our unique datadriven platform allows the global executive to access our benchmarking indexes, country briefs, rankings, economic statistics and more from a desktop or mobile device anywhere in the world.

Contact:

Rosemary Begg rbegg@latintrade.com Tel: 305-749-0888 Toll free: 1-800-765-0453

www.latinbusinesschronicle.com

LATIN BUSINESS

CHRONICLE latinbusinesschronicle.com

COUNTRY REPORT: MEXICO

THE MACRO NUMBERS

Mexico Fast Facts

GDP and Inﬂation in Mexico GDP

INFLATION

Population: GDP: Currency: GDP Growth: Inﬂation: Exports: Imports:

110.6 million $1,039 billion Peso 5.5% 4.2% $298.4 billion $301.5 billion

Note: All ﬁgures for 2010. Sources: International Monetary Fund, Central Bank of Mexico, Population Reference Bureau, Latin Business Chronicle

How Mexico Compares Sources: IMF, Mexico Central Bank, Latin Business Chronicle

Meanwhile, limited healthcare budgets and increasing pressures on government healthcare funding are creating challenging tender models, Kupatt says. Manuel Molano, deputy director of the Mexican Institute for Competitiveness, expresses some concern with high debt loads in some states and municipalities. “The Mexican government is the principal debtor of the banking system,” Molano says. “It’s crowding out the private sector.” Corruption remains problematic in Mexico, with the country dropping to 98th place in the latest Transparency International survey — and trailing other Latin American countries, such as Colombia, Chile and Guatemala. Enforcing contracts remains problematic, too. Mexico ranked 81st on the enforcing contracts section of the World Bank’s Doing Business 2011 survey, despite making drastic improvements in other areas. Education and the development of executives remained problematic for Rosset of Michael Page, whose recruitment firm expanded during the economic downturn, in part, he says, because so many companies were unable to find adequate talent. “What we need to develop the country is a level of training that develops more autonomous individuals, that develops people with a more critical sense,” he says. “We still have too much acceptance of things (as they are) in too many cases. This is because of education.”

OUTLOOK NEXT THREE YEARS Mexico’s GDP is expected to grow by an annual average of 4 percent over the next three years, according to a Latin Trade analysis of IMF projections. Companies also are bullish on the outlook for the next three years. Electrolux’ Merchor has a “very positive outlook,” while Grace Lieblein, president of General Motors México, believes the automaker will be profitable despite moderate growth. The implementation of regulations providing for universal healthcare coverage by 2012 provides companies such as Baxter with the opportunity to expand access to patients and healthcare professionals across Mexico, Kupatt says. The company also should benefit from expanded coverage of its renal and hemophilia therapies through Seguro Popular (the Social Health Protection System of Mexico). “Our next three years in Mexico will be solid,” says Emerson’s Rodriguez. — With additional reporting by Joachim Bamrud. editorial@latintrade.com

LATIN TRADE 05-06/2011

Mexico outshines Brazil and its neighbors on several international rankings and indexes. In the World Bank’s Doing Business 2011 survey, Mexico ranks first in Latin America. Meanwhile, when it comes to labor environment for companies, Mexico ranks second after Chile, according to the Latin Labor Index from Latin Business Chronicle. However, when it comes to tax environment, infrastructure, security and technology level, Mexico lags behind many of its regional neighbors. And although Mexico has the largest tourism market and is the top trading nation in Latin America, it scores relatively low on the Latin Tourism Index and the Latin Globalization Index, which reviews tourism and trade as a percent of GDP. Labor Environment: Mexico ranks second in Latin America (Chile is ranked the best). Infrastructure: Mexico ranks eighth in Latin America on the transport infrastructure subindex (Chile is No. 1). Security: Mexico ranks as the sixth-mostdangerous country in Latin America for multinational executives (Costa Rica is ranked the safest). Tourism Impact: Mexico ranks sixth in Latin America for the impact of foreign tourism on its economy (Uruguay ranks first). Technology Level: Mexico ranks 10th in Latin America in overall technology penetration levels (Uruguay ranks first). Globalization: Mexico has Latin America’s 10th-most-globalized economy (Panama ranks as the most global). Tax Environment: Mexico ranks as the seventh-worst country in Latin America (Chile is ranked the best). Sources: Latin Globalization Index 2010, Latin Infrastructure Index 2010, Latin Labor Index 2010, Latin Security Index 2011, Latin Tax Index 2010, Latin Technology Index 2010, Latin Tourism Index 2010. All indexes, except the Latin Security Index, are from Latin Business Chronicle, a unit of the Latin Trade Group. The Latin Security Index is developed by FTI Consulting for Latin Business Chronicle.

First Person GM: We Are Optimistic General Motors is the top automaker in Mexico. Last year the company produced 559,350 units, according to the Mexican Auto Industry Association (AMIA). Grace Lieblein, president and managing director of General Motors México, talks to Latin Trade about the results and the outlook for 2011 and the next three years. Latin Trade: How was GM’s performance in Mexico last year? Did you grow your business (in terms of revenues and output)? If so, how much? Why? Lieblein: In GMM we closed 2010 with a 12.4 percent sales increase vs. 2009, which shows that last year was better than the two previous years, but the recovery of the domestic market is still slow. As an example, in 2006 the Mexican market reached the number of 1,200,000 units, and gradually, during the last four years, it has been deteriorating. Despite the 9.5 percent growth in the whole automotive industry in 2010, the figure of 874,913 units sold last year is still a very low performance for this market that must sell at least 1,500,000 units. Latin Trade: Do you expect similar growth this year? Why? Lieblein: We started this year with a lot of activity, and we think this is a good sign. For 2011 we expect that the economy can bring a reasonable growth to give stability to the Mexican market. 2010 was a good year of recovery for General Motors around the world, and we are optimistic for the future in Mexico in the short and medium terms. Latin Trade: What is the most important challenge GM is facing in Mexico today? Lieblein: We believe that the biggest challenge in coming years is that the market reaches an adequate sales level. Mexico has a good potential for growth, but we must work hard on issues related to accelerating domestic market growth. This includes providing better access to credit, tax incentives and regulating the import of used vehicles. If we achieve that, Mexico has the potential of a domestic market that exceeds 1,800,000 vehicles sold per year, and we believe that the development of industry and the whole economy will be much better. For this year we are expecting sales around 900,000 vehicles. Latin Trade: How do you view GM’s business outlook in Mexico the next three years? Lieblein: For Mexico, the next three years will be of moderate growth, below the capacity of the market. However, we are optimistic, and we believe that stability will allow us to be profitable. In the same way, we note that our products will continue in the preference [of ] our customers, participating strongly in virtually all market segments. Moreover, if we reach a public policy that allows the importation of used vehicles in a responsible way, this could be a real impetus for growth in the automotive industry.

COUNTRY REPORT: MEXICO

Emerson: Solid Next Three Years For U.S.-based Emerson, the world’s largest maker of power equipment for oil companies, Mexico is the fastest-growing market in Latin America. Leonardo A. Rodriguez, president of Emerson Latin America, talks to Latin Trade about the results and the outlook for 2011 and the next three years. Latin Trade: How was Emerson’s performance in Mexico last year? Rodriguez: Emerson’s business in Mexico had a higher growth rate than [in] any other country in Latin America in 2010. Our growth was fueled by intense investments in the oil and gas sector, the metals and mining sector and the power sector. Our presence in Mexico, with 39 manufacturing plants and 16,000 team members, allowed us to pursue business as a Mexican company with corresponding local national content. This fact provided competitive advantage. Additionally, we exported from Mexico to other parts of the world more than $3 billion in ﬁnished and unﬁnished products. Few companies have this presence in Mexico. It provides Emerson with sustainable competitive advantage. Latin Trade: Do you expect similar growth this year? Rodriguez: We expect similar growth this year, even with some early presidential election inertia. Commodity markets are hot, Mexico has the funds to invest in new industries and related spaces, and there is a sense of urgency to address the challenges in the oil and gas sectors. In addition, the pipeline plan to structure and organize this sector is well under way. I am very encouraged with our experience and with what I am seeing. Latin Trade: What is the most important challenge Emerson is facing in Mexico today? Rodriguez: Our biggest challenge is the distraction and disruption of the narco violence. It’s mostly psychological, but perception at times becomes reality. [However,] Mexico is not a failed state. Latin Trade: How do you view Emerson’s business outlook in Mexico over the next three years? Rodriguez: Our next three years in Mexico will be solid. We will experience a small glitch before and after elections, but Mexico is here to stay. Once again, our local manufacturing presence, our ability to supply the local market and our ability to export are the envy of our peer group.

05-06/2011 LATIN TRADE

COUNTRY REPORT: MEXICO

HOW SAFE IS MEXICO? How does the drug violence really affect business in Mexico? Despite the high number of casualties in President Felipe Calderon’s five-year-old war on Mexico’s drug cartels, business executives and most experts say the country remains safe overall. “For businessmen who are flying into the main cities, or tourists flying into the resort destinations, they wouldn’t have any reason to be concerned about the violence,” says Trip Barrett, vice president of brand management in Latin America for Starwood Hotels and Resorts. “Unless you’re involved in narco trade or driving across the border, it’s not an issue.” The facts bear him out. “The innocent civilians still account for only a fraction of the deaths,” says Sergio E. Díaz, managing director of the Mexico office of Kroll. Díaz estimates they account for only 2 percent to 3 percent of the more than 36,000 deaths so far in Mexico’s drug war. Another 7 percent were law enforcement officers or soldiers, while 90 percent were members of drug gangs fighting for turf, officials and experts say. “The drug cartels are not political,” says John Price, managing director of Americas Market Intelligence. “They do not go out of their way to target foreigners.” Most of Mexico’s drug violence is concentrated in a few cities, mainly along the border with the United States. “That’s where most of the money is to be made,” Price says.

Forensic experts work at the site where at least 18 bodies were found in a clandestine grave in the El Capricho Ranch, near Mexico’s northern border city of Ciudad Juarez on Nov. 29, 2010.

LATIN TRADE 05-06/2011

The most affected cities are Ciudad Juárez on the U.S. border, by far the most violent single city in Mexico; Tijuana, bordering California; and Culiacán, capital of Sinaloa state, according to IHS Janes, which is based in the United Kingdom. “The greatest amount of drug-related violence takes part in areas where two or more criminal groups are struggling for control for the lucrative trafficking routes into the United States,” says Anna Gilmour, a senior analyst on organized crime at IHS Janes. The problems are particularly acute in, although not exclusive to, the northern states of Sinaloa, Sonora, Baja California, Tamaulipas, Coahuila, Durango and Chihuahua, and the Pacific seaboard states of Guerrero and Michoacán, Gilmour says. “Mexican civil society operates largely in the same way it did prior to the government’s push to dismantle organized crime,” the American Chamber of Commerce in Mexico said in a report called Foreign Direct Investment in Mexico: Is Your Investment Safe? “Mexico is not in the midst of a civil war or on the verge of collapse. Mexicans go to work and school every day, factories and service providers continue to operate, financial institutions are functioning, property is bought and sold, regulators issue permits, and the list goes on.” Says Leonardo Rodriguez, president for Latin America for U.S.based Emerson, which has large operations in the country: “Mexico is not a failed state.” Overall, Mexico ranks as the sixth-most-dangerous country in Latin America for foreign multinational executives, according to the 2011 Latin Security Index from Latin Business Chronicle and FTI Consulting. The index analyses various factors, including murder and kidnappings, and includes polls among FTI’s Fortune 500 clients in Latin America. The index rates Haiti and Venezuela as the most dangerous countries in Latin America, while Costa Rica, Chile and Uruguay are considered the safest. CIUDAD JUAREZ Outsiders often think of violence when Ciudad Juarez is mentioned. Bob Cook, who promotes manufacturing and maquiladora development in the region, thinks opportunity. A growing number of companies are thinking the same and sinking money into the border town, which is considered ideal for its infrastructure and location opposite El Paso, Texas, but one marred by organized-crime violence and a murder rate of 230 people per 100,000 inhabitants — the highest rate in the hemisphere. Figures from the El Paso Economic Development Corporation, also known as REDco, show a strong turnaround

OCTAVIO FLORES/XINHUA/PHOTOSHOT/NEWSCOM

BY DAVID AGREN AND JOACHIM BAMRUD

S PECIA L A D V ERTISIN G FEATU R E

Work Smarter, Not Harder Flexible Office Solutions — Designed for Today’s Business World

From a private individual office

to a collaborative working suite or a virtual presence, Infinity Spaces offers flexible, affordable solutions for today’s fast-paced business world. Our conveniently located business centers provide a luxurious executive environment with a full complement of support services and amenities – including the latest generation of collaborative technology tools. Staffed with highly trained office professionals who speak several languages, our concierge-quality turnkey solutions are designed to enhance productivity and support professionals who do business close to home – and around the world.

You don’t have to go to work, to work. Mobile technology has changed all of that. So what does that mean for the workplace? The work place needs to change and evolve. To support how work happens and how workers behave. To provide a place that keeps pace with what workers need today. It’s anywhere + anytime + highly collaborative. Organizations have to be both lean and creative. What’s going on with workers? They’re mobile. They’re diverse - generationally, culturally and professionally. They know what they want and who they want to work with and for. What do they want from their workplace? A place where they connect and collaborate. A place where they can be seen and be heard. A place to learn and to share.

Our clients trust us to manage their day-to-day office needs. From choosing the right chairs and preparing a conference room to arranging a videoconference or online working session, we are dedicated to our clients’ success. CONTACT INFORMATION Infinity Spaces 1001 Brickell Bay Dr. Suite 2700 Miami, FL 33131 Tel: +1 305 503 7722 www.infinityspaces.com info@infinityspaces.com

Drug-cartel crime is rare in tourist areas in Mexico. A highly publicized attack at a bar in Cancun occurred far from the resort city’s hotel zone, pictured here, where most Mexican and foreign tourists stay for the duration of their visit.

in Ciudad Juarez, which has gained 26,065 maquiladora jobs from June 2009 — when REDco says the manufacturing sector touched bottom — to February 2011. REDCo also reported that northbound commercial truck traffic through the Ciudad Juárez border increased by 14 percent in 2010. “We see a lot of existing companies going through expansions,” says Ken Morris, president of the Crossborder Group Inc., a consultancy operating in both San Diego and Tijuana. The latter city has enjoyed a boom manufacturing medical devices, he says. Growth in manufacturing has been impressive along the border — more so in Chihuahua and northeastern Mexico, mainly

LATIN TRADE 05-06/2011

because of the auto sector, Morris says. He adds that much of the renewed interest in Mexico comes from a combination of geography, workforce expertise and the increasing challenges and costs — mainly in labor and transport — of doing business in China. Sweden-based Electrolux, the world’s second-largest appliance maker — to name one company — announced plans last year to build a refrigerator plant in Ciudad Juárez. In addition, Electrolux operates a facility that manufactures washers and dryers. “The laundry plant has recently added production of top-loading washers and related dryers in addition to the front-loading washer products for which the plant was created,” says Winston Merchor, general manager of Electrolux Mexico. Meanwhile, a third plant that has operated in Ciudad Juarez for more than 20 years produces vacuum cleaners. “Location, infrastructure and a skilled work force ... continue to make Juárez attractive for investors,” says Cook, president of REDCo in El Paso, Texas. Violence, though concerning and potentially costly, is dissuading few companies already established in Mexico from expanding operations or making investments, business leaders say. Newcomers, meanwhile, are increasingly looking past the gory headlines of an organized-crime crackdown that has claimed more than 35,000 lives since President Felipe Calderón took office and has spread recently into previously calm states with strong foreign investment presences, such as Jalisco and San Luis Potosí. The exact impact on business and investment of the drug violence is hard to gauge, although Central Bank Governor Agustin Carstens conceded earlier this year: “It’s a factor that could inhibit investment and economic growth.” “Clearly, there are costs involved,” says Rosalind Wilson, CEO of Canadian Pacific Railway in Mexico and president of the Canadian Chamber of Commerce in Mexico. But “we’ve not seen anyone go home” because of insecurity, she says. Gerardo Gutiérrez, president of the business group Coparmex, says extortion and threats of violence have affected small and medium companies the most, as they are unable to protect themselves to the same degree as larger companies can. Johannes Hauser, managing director of the Mexican-German Chamber of Commerce and Industry, says perceptions of violence risk dissuading some smaller foreign companies from investing in Mexico. But he adds: “The companies [already] experiencing Mexico are positive and looking to expand.”

CANCUN CONVENTION & VISITORS BUREAU

COUNTRY REPORT: MEXICO

“Our biggest challenge is the distraction and disruption of the narco violence,” says Emerson’s Rodriguez. “It’s mostly psychological, but perception at times becomes reality.” TOURISM Tourism is one of the sectors that have been hurt the most by that perception. Foreign hotel chains report significant drops in occupancy in resort hotels, especially in top tourist cities such as Cancun and Acapulco, even with already low prices after the H1N1 virus epidemic in 2009. “Tourist areas have traditionally experienced lower levels of drug-related crime, with the greater threat emanating from tourist-focused crime, such as petty theft,” Gilmour says. “This is not so much due to the greater efficiency of police forces in the areas as [because of ] a lack of conflict between drug groups.” However, there have been some high-profile incidents of violence in both Acapulco and Cancun, such as when 13 people — five of them police officers — were killed in Acapulco in March 2010. “This suggests that drug violence is increasingly spilling over into Acapulco, although still at lower levels than the northern border states,” Gilmour says. “The area around Acapulco is largely controlled by the La Familia cartel, which suffered a number of blows in late 2010, such as the killing of its leader. This may en-

Argentina . . . . . . . . . . . . . . .0810-999-8500 Aruba . . . . . . . . . . . . . . . . . . .297-58-55300 Bahamas . . . . . . . . . . . . . . . .242-377-8300 Belize . . . . . . . . . . . . . . . . . . . .501-207-1271 Brazil . . . . . . . . . . . . . . . . . .0800-701-0099 Chile . . . . . . . . . . . . . . . . . . . .56-57-575627 Costa Rica . . . . . . . . . . . . . . .506-257-3434

courage both security forces and rival gangs to target La Familia and attempt to gain territory from them, potentially spilling over into greater violence on the street.” Cancun also has had incidents of drug-related violence, such as the killing of eight people in August 2010 when gasoline bombs were thrown into a bar outside the tourist zone, Gilmour says. “Despite this violence, tourists do not appear to be specifically targeted in either Cancun or Acapulco,” she says. “There is little strategic reason for drug cartels to target tourists, as this only serves to further antagonize security forces and does not gain them any territorial benefit. In addition, carrying out attacks on tourists would quickly serve to deter tourists from visiting the area and would reduce revenue for the drug gangs, which gain some funding from extorting local businesses.” OVERCOMING PROBLEMS Bob Cook says he meets the problems — mainly those of perception — head-on when promoting Ciudad Juárez and El Paso by providing companies with complete information. He says the results come back positive in nearly every situation. “Everyone, with one exception, has said ‘Yes,’ ” Cook says. editorial@latintrade.com

Curacao . . . . . . . . . . . . . . . .599-9461-3089 Dominican Rep. . . . . . . . . . .809-333-4000 El Salvador . . . . . . . . . . . . . .503-2339-7799 Grand Cayman . . . . . . . . .1-866-478-3421 Guatemala . . . . . . . . . . . . . .502-2277-9070 Honduras . . . . . . . . . . . . . . . .504-238-4726 Mexico . . . . . . . . . . . . . . . . .1800-021-2277

Nicaragua . . . . . . . . . . . . . .505-2255-7981 Panama . . . . . . . . . . . . . . . . .507-204-9555 Puerto Rico . . . . . . . . . . . . . .787-253-2525 Uruguay . . . . . . . . . . . . . . . . . . .0800-8278

05-06/2011 LATIN TRADE

SPECIAL REPORT: CSR

Natura, the maker of natural skin-care products and cosmetics, incorporates its sustainability ethos into consumer marketing and sales materials and promotes it among employees, 3,500 of whom work at the corporate campus in Cajamar, SĂŁo Paulo state, in ofďŹ ces or the main factory, seen here.

LATIN TRADE 05-06/2011

SPECIAL REPORT: CSR

BRAZIL’S CSR LEADERS Banco do Brasil and Natura are among the corporate social responsibility leaders in Brazil, while foreign companies like Citi and Dow also push for CSR programs.

PHOTO: COURTESY OF NATURA

BY VINCENT BEVINS

SÃO PAULO — Latin America’s leading economy, Brazil, is attempting to take center stage as the region’s leader in corporate social responsibility (more often these days considered under the umbrella of “sustainability” or “social-environmental responsibility”) and is one of the world’s fast-growing developing nations most committed to global sustainability practices. But this has so far been led primarily by large Brazilian companies who have gone abroad — generally speaking, the large and more globalized the company, the more likely they are to have adopted CSR policies. “Brazilian companies have gone international, and that’s a new big pressure,” says Claudio Boechat, sustainability expert at the Fundação Dom Cabral, a prestigious business school. “When you go abroad, if you prove that you are more inclusive, you get more attention.” But a set of local pressures and the example of the big guns may cause local and smaller players to start to catch up. According to the Ethos Institute, which since 1998 has led the charge to bring the Brazilian economy on board with CSR best practices, more than 1,400 companies that account for 35 percent of Brazilian GDP are working with the institute toward social and environmental sustainability. This is growing every year. And many more will at least have a story to tell consumers and the media about the efforts they are making. Locally, companies are being nudged in this direction by a familiar set of incentives: reputational risk, the concerns of consumers and government legislation. But in Brazil, the very

powerful financial sector also plays a role by making loans more likely for companies with established sustainability practices.

BANKING SECTOR Banco do Brasil, the public bank that is also the country’s largest, follows current fashion in leaving the term CSR (RSE, or responsabilidade social empresarial in Portuguese) behind. They prefer “social-environmental responsibility.” “The moment for CSR, at least as a term, is over,” Boechat says. “Those who use it are often seen as behind in the new discourse that wraps the issue up with broader environmental and social sustainability.” In Brazil, public banks are not shy about admitting the influence of state or social goals in addition to profit maximization. After the crisis, the government openly pressured Banco do Brasil to increase lending to consumers to largely keep the country from slipping into recession. Similar mechanisms are at work with the bank’s push for sustainability. “Social-environmental responsibility at Banco do Brasil merges with the bank’s own reason for existing, which is to contribute to sustainable development in the country,” says Robson Rocha, vice president of sustainable development at the bank. The bank first really took a strong stance on sustainability in 2003, he says, and has since developed a special portfolio for regional development assistance to the tune of 10 million reais (US$6.2 million). Then there is Water Program Brazil, developed with the World Wildlife Foundation. But the bank’s most important

05-06/2011 LATIN TRADE

SPECIAL REPORT: CSR

“

There will be no place in the market for companies that haven’t incorporated social and environmental concerns into their corporate strategies.” — Robson Rocha, vice president of sustainable development, Banco do Brasil effect on the country’s sustainability practices comes through its lending decisions to the broader economy. “In the risk-analysis process, we’ve adopted social-environmental evaluation as one of the parameters, “ Rocha says. “We won’t take on clients involved in degrading work practices, and we won’t assume the risk of credit with clients responsible for serious damage to the environment.” The process of moving Brazil in a responsible direction is a “path of no return,” Rocha says. “In a short while there will be no place in the market for companies that haven’t incorporated social and environmental concerns into their corporate strategies.” It is not only the public banks with strong sustainability credentials. Private outfits Itaú Unibanco and Banco Bradesco, the second- and third-largest Brazilian banks, respectively, were early adopters as they became globally competitive. Nor is the financial sector’s involvement limited to the Brazilian banks. Citi’s corporate social responsibility efforts in Brazil date back nearly two decades. What began with an inaugural community project in 1994 has evolved into a sustainability strategy focused on four “pillars”: financial education, sustainable finance, diversity and socio-

LATIN TRADE 05-06/2011

environmental investment. Although these goals are shared by Citi operations worldwide, executives in Brazil implement them in ways that make sense for this market. “By promoting volunteering, adherence of the local franchise to the Equator Principles and by making social investment focused on sustainable business, Citi Brazil started to institutionalize the path chosen to integrate and achieve sustainability,” CEO Gustavo Marin says. “The creation of the social and environmental responsibility area [in 20052006], with a dedicated team, marked the beginning of monitored and strategic social investments and of efforts to align social investment with Citi’s business focus.” That alignment is perhaps most evident in its efforts to promote financial education. Citi Brazil collaborated with the Brazilian Bank Federation (Febraban) to create an agenda for the inaugural financial education congress held in São Paulo last year. “This dialogue enabled Citi Brazil’s decision to invest in a public-private partnership that is piloting financial-education methodologies in public school curriculums, which aim at addressing the long-term component of an emerging middle class,” Marin says.

SPECIAL REPORT: CSR Financial institutions, Febraban and the Association of Credit Card and Service Companies (Abecs) are aware of the risks of over-indebtedness and its financial impact on business and society, Marin says. “Greater transparency on the communication directed to this [new C] class has been considered, including the review of contracts and communication practices in order to provide clearer information and prevent lack of payment, over-indebtedness and stimulate the conscious use of credit,” he says. “The great challenge in this area for the financial market is to communicate in a clear, direct, transparent and effective way with this new class.” Marin also sits on the board of the Mais Unidos Group, which aims to foster CSR efforts. Launched in 2006 by the then-U.S. Ambassador to Brazil, it is a public-private partnership between the U.S. Agency for International Development (USAID) and American companies with operations in Brazil. Today, roughly 100 companies representing a broad range of industries participate. Mais Unidos’ board is led by co-chairs U.S. Ambassador Thomas Shannon and Michel Levy of Microsoft.

EXISTING COMPANIES Jorge Abrahão, president of the Ethos Institute, says the group’s first priority now is not to go after the companies that represent the other 65 percent of the economy. “Rather, our challenge is to develop further the companies that are already together with our development platforms,” he says. “They can

bring lots of other people on board and serve as an example to convince the government and the markets that everyone else should come along.” One obvious draw to sustainability for certain kinds of publicly visible companies is citizen concern. “Thirty percent of consumers say that, at the moment of making purchase decisions, they think about sustainability. And that number is growing every year,” Abrahão says. “There are companies that don’t have that direct relationships with the consumer,” he adds. “But everyone has relationships with credit, with finance and with the government, and the question of responsibility is changing for them, too, as a result.” Critics say the government has been too complacent, allowing big development projects to come before local environmental or human concerns. Most controversially, the Belo Monte dam project has been accused of being likely to disrupt river systems and displace indigenous peoples. It became a popular issue with film director James Cameron, former U.S. President Bill Clinton and actor/politician Arnold Schwarzenegger. More prosaically, the slow destruction of the Amazon, largely to clear lands for bovine grazing, has continued. “Reputational concerns are the most important at the moment, more so than customer or government or financial pressure,” Boechat says. “The companies have not matured enough to deal with this subject in the core businesses, and many don’t know how to get real value from engagement [with sustainability]. But reputation matters.” The most high-profile and classic example of a company using the sustainability message to reach consumers directly is likely Natura, the

DARDEN Executive Education

Tomorrow’s challenges will be different. The opportunities will too. READY?

OPEN-ENROLLMENT PROGRAMS • CUSTOM PROGRAMS • CERTIFICATE PROGRAMS • CORPORATE UNIVERSITIES • CONSORTIA

How will you continue to succeed in a constantly shifting environment? At Darden, you will examine the strategies and practices that will prepare you to act and help you drive success. Experience Darden. Visit www.darden.virginia.edu/exed.

Upcoming Programs The Mind of the CFO: Becoming a Strategic Leader August 22–26, 2011

Servant Leadership: A Path to High Performance—NEW! November 6–11, 2011

05-06/2011 LATIN TRADE

SPECIAL REPORT: CSR

beauty-care provider. Like Avon, they use a direct-sales model but outsell the American cosmetics company by stressing its Brazilian roots, recycled materials and good relationship to its local sources. In 2007, the company launched a very public campaign to achieve a carbon-neutral production chain. Though it is still far off, its efforts have been much-publicized, as have products free of animal testing, good relationships with workers, and soaps made of plants. Since then, Natura has developed a wide set of goals and large institutional framework for directing sustainability decisions. “In 2008 we chose six priority themes,” says Janice Casara, sustainability manager at Natura. “The Amazon, biodiversity, greenhouse gases, education, product impact and quality of relations. These are reported by the sustainability committee to the senior management of Natura.” “The sustainable use of biodiversity, for example, is one of our main innovation platforms,” Casara says. “This is a business decision.” “We are guided by market studies which reaffirm the assertiveness of our business strategy,” she says. “The biggest increase in [consumer] consciousness has come in questions related to the ethical supply of natural resources, equitable distribution of benefits and biodiversity conservation. In Brazil, 93 percent of consumers have heard of biodiversity, a larger number than have heard of sustainable development or fair trade.” Most analysts admit Natura’s efforts to connect have been successful. The company’s prestige is so recognized that the credibility of Green Party presidential candidate Marina Silva’s campaign was boosted when she chose Guilherme Leal, Natura’s president, as her running mate last year. “Every day the understanding grows that our current development model needs to change,” Casara says.

GREEN DESIGN Dow Brazil and the Dow Chemical Company Foundation were the lead sponsors of a Nature Conservancy three-year project that began in 2008 in the Cachoeira watershed to help restore the ecosystem that provides water to São Paulo. That project set the stage for Dow’s global, five-year, $10 million partnership with The Nature Conservancy that was announced earlier this year. Both globally and locally, Dow is emphasizing education, environment and entrepreneurship, and back in 2005, it outlined a 10-year plan for Brazil. The company is conscious of reducing its own footprint as it also seeks to develop products that allow others to do so, too, says Paul Oakley, public affairs director, Dow Latin America. For example, when Dow was building a new headquarters for Latin America in São Paulo, the design was green. Dow plans to construct a polyethylene plant in Brazil that uses ethanol derived from sugar cane as a feedstock. The company has already secured 17,000 hectares of sugar cane for the plant. “We continue to be enthusiastic about the benefits of a cane-to-polyethylene project for Dow’s growth in Brazil, as well as providing a renewable-plastic offering and self-sufficient bio-energy source, both of which reinforce

LATIN TRADE 05-06/2011

Dow’s reputation as a worldwide leader in sustainable chemistry,” Oakley says. Dow is now launching a 100-percent polyethylene stand-up pouch that can be recycled. “This has been developed in Latin America and will be leveraged around the world as it is a breakthrough in sustainable packaging,” Oakley adds. But even in less obvious sectors, companies have taken it on themselves to have a sustainability policy. OdontoPrev, the dentistry company, is now working with Ethos and has a recycling joint venture with the University of São Paulo and offers free service to thousands of needy families. “The Brazilian citizen is becoming more and more conscious and selective,” says José Roberto Pacheco, executive director at OdontoPrev. “In the last few years, the consumer is starting to believe that the activities of a socially responsible company need to go further than what the law requires.” OdontoPrev also has programs for water reduction and plants trees in the attempt to offset its carbon usage. Pacheco rattles off statistics as to the efficacy of these and stresses the importance of shutting off lights and powering down computer monitors. He says awards are given to employees and collaborators who can reduce energy consumption. “With time, the tendency is that it’s easier for the consumer to distinguish between companies that effectively adopt CSR practices based on consistent principles and those that just have fragments and don’t reflect real corporate beliefs,” Pacheco says. Of course, there is still plenty of greenwash, and, like in most countries, it is more important to have a credible sustainability policy than to actually be sustainable. “I don’t like to point to our best examples of companies,” says Abrahão, “because in reality the country doesn’t have a single company that is entirely socially or economically sustainable.” He adds, “Every company we work with is in a process of development.” But when asked for the most relevant sectors, he lists the same as most international reports — banking, construction and mining. It is not a coincidence that these are also the sectors with the largest companies or the biggest international profile. For example, construction company Odebrecht acts widely internationally. Likewise, Vale, the mining giant largely responsible for Brazil’s No. 1 export, iron ore, is frequently cited as an industry leader. For Vale, a strong reputation in sustainability makes its many movements abroad easier. “You cannot really say that small companies have a strong role yet. They could have a strong role if they become part of the commerce associations, but it hasn’t yet happened,” says Boechat, the sustainability expert. “But we think that there is a pressure [that] is generalized now. The government is talking about it, everyone knows about climate change, and everyone is talking about inclusive markets and businesses — how to change the value chain, how to get value from all the relationships in it. I think it’s a new moment for Brazil.” — Mary Sutter in Miami contributed to this report.

editorial@latintrade.com

SPECIAL REPORT: TRADE & LOGISTICS

TRADE GROWTH

BOOSTS LOGISTICS Logistics executives and trade experts see a solid outlook for Latin American trade. BY JOACHIM BAMRUD

omaine Seguin is upbeat about Latin America. The president of the Americas division of U.S.-based logistics giant United Parcel Service saw her company’s business in the region grow strongly last year and expects the trend to continue this year as well. In Brazil, UPS’s average daily export volume grew by more than 10 percent last year. Other growth winners include the Dominican Republic (up 35 percent in the fourth quarter) and Colombia (up 40 percent during 2010).

LATIN TRADE 05-06/2011

PHOTO: COURTESY OF UPS

Robust and open global trade drives the worldâ&#x20AC;&#x2122;s economic engine and boosts Latin American competitiveness, says Romaine Seguin, president of the Americas, UPS

05-06/2011 LATIN TRADE

SPECIAL REPORT: TRADE & LOGISTICS

“Colombia broke new records,” Seguin says. Logistics companies such as UPS should get a further boost once the U.S.-Colombia free trade agreement is implemented. After significant U.S. political delays in approving the five-year-old pact, the administrations of U.S. President Barack Obama and his counterpart in Colombia, Juan Manuel Santos, reached an agreement in April to move forward. “Pending free trade agreements between the United States and countries such as Colombia will impact the level of trade between the region and the United States,” Seguin says. Also, Swiss-based freight forwarder and logistics company Panalpina is optimistic, especially about Brazil. “The internal logistics [distribution] in Brazil is growing with a strongly developing domestic consumer market due to the increase of middle-class buying power,” says Daniel Setz, Panalpina’s Brazil country manager. “Due to a strong real [Brazil’s currency], import trade flows will remain strong, and we foresee a further growth in imports of finished products. [However,] the strong Real will affect negatively the export flow of the industry of semi- and finished products in Brazil that was focused on exports.”

trade this year, driven by continued Asian demand and high commodity prices. “Trade with China has increased dramatically, with exports from South America growing by an average exceeding 25 percent per year since 2004 — even taking into account the crisis year of 2009,” Kotschwar says. She also says the IMF estimates that China will continue to grow at a rate of more than 9.5 percent in 2011 and 2012. But rising oil prices, uncertainties in the U.S. economic recovery and signs of inflation in China could put a damper on subsequent growth, Kotschwar says. The European Union, Asia and Canada are all pursuing free trade agreements with Latin America, and the United States appears to finally be moving closer to approving the five-year-old U.S.-Colombia free trade agreement. All of that is a net positive for Latin America, helping reduce its dependency on one specific trade partner, Cohen argues. “I have always said monogamy in trade relations does not pay well,” he says. “Diversification is the key to successful trade relations. In that sense, given the difficulties in completing the Doha Round, FTAs should be actively pursued with whoever is inter-

Monogamy in trade relations does not pay well.” Isaac Cohen, president of consultancy Inverway Both Seguin and Setz point to the rosy economic outlook of Latin America and Brazil. “Looking ahead into this year, there is an expectation for continued growth in [Latin America],” Seguin says, pointing to estimates from the International Monetary Fund of GDP growth of 4.7 percent in 2011. The IMF estimates Brazil’s economy, Latin America’s largest, will expand by 4.5 percent this year. “World Cup in 2014 and the Olympic Games in 2016 will bring investments and will develop Brazil even further,” Setz says. “Brazil has developed into a stable economy, attracting high levels of foreign investments.” Overall, the outlook for trade in Latin America this year is very good, experts say. “The 2011 [outlook] for Latin America and Caribbean trade is brilliant, with the rates of growth in Asia, including insatiable demand for raw materials in China and India, as well as U.S. economic reactivation,” says Isaac Cohen, president of consultancy Inverway and a former Washington director of the UN Economic Commission for Latin America and the Caribbean (ECLAC). The U.S. recovery should not be underestimated, as the United States is still the main trading partner for many Latin American economies and the biggest market in the world, with the dollar-exchange rate favoring U.S. exports to the region, Cohen says. Barbara Kotschwar, a research associate at the Peterson Institute for International Economics, also sees a good outlook for

LATIN TRADE 05-06/2011

ested. True, they are a second-best, but still effective while we wait for multilateralism to deliver. As the saying goes in French, FTAs are good, faute de mieux [for lack of anything better].”

KEY TRADE ROUTES Panalpina’s business in Brazil will be spurred by the country’s trade growth with all regions, Setz says. “With the Asian economies continuing their growth path, the trade between Brazil and Asia will continue to show strong growth both ways … mainly driven by imports of semi- and finished products compared to the exports of commodities and raw material,” Setz says. Meanwhile, trade between Brazil and other Latin American countries will continue to grow as part of Brazil being the regional powerhouse, he believes, with one caveat: “The strong Real could … slow this growth.” Trade with the United States should receive a new boost with the political and economical policies currently being adapted, Setz says. Experts say relations have improved since Obama visited Brazil in April. And Europe will remain an important trading partner of Brazil because of the extensive amount of European companies in Brazil and imports of semi- and finished products for the production companies and lines in Brazil, Setz says. “All in all … trade should grow from all trading regions, continuing the boost of the flow of cargo in and out of Brazil,” he says.

SPECIAL REPORT: TRADE & LOGISTICS

Seguin says Latin America’s diverse economic levels, industries and market complexities from one country to the next make it difficult to speculate what the driving trade routes will be this year. However, she points to the still-dominant role the United States plays in Latin America’s international trade. Last year, U.S. trade with Latin America reached $636.3 billion, the equivalent of 37.3 percent of the region’s total trade, according to a Latin Business Chronicle analysis of U.S. Census Bureau data and estimates from ECLAC. “With the continued rise of fuel costs, the cost of trade will also increase, thus prompting investments into near-sourcing strategies for production and transportation,” Seguin says. “A persistence of these costs will most likely maintain the United States as Latin America’s top trading partner.” Meanwhile, pending free trade agreements between the United States and countries such as Colombia will affect the level of trade between the region, and other factors — such as the Panama Canal expansion and Brazil’s most recent oil discovery — also could affect trade levels between Latin America and the other major regions

However, intra-Latin American trade agreements have generated, on average, less trade — although some important advances have been made. “Mercosur’s overall trade has expanded significantly since the consolidation of the agreement, even as intraregional trade as a percent of total has remained relatively stable,” Kotschwar says. “On average, however, more energy is spent on politics than economics in initiatives such as the Unasur and some of its regional relatives.” One initiative with potential to boost trade is the Arco del Pacífico [Pacific Arch] initiative, which aims to iron out some of the “spaghetti bowl” wrinkles among FTAs signed by a handful of Latin American countries, Kotschwar says. The Arco del Pacífico includes Pacific Coast countries Mexico, Chile, Colombia, Ecuador, Panama, Peru and Central America.

MORE NEEDED By increasing the flow of exports and imports from and to Latin American countries, free trade agreements can boost

Robust and open global trade drives the world’s economic engine.” Romaine Seguin, president of the Americas, UPS of the world, Seguin says. The United States is now moving ahead with a five-year-old free trade agreement with Colombia after years of political delays. If it is approved by U.S. lawmakers this year, it could be implemented sometime in late 2012 or early 2013. The United States already has FTA’s with Chile, Peru, Central America and the Dominican Republic, as well as with Mexico through the North American Free Trade Agreement (NAFTA), which also includes Canada.

THE FREE TRADE EFFECT “Robust and open global trade drives the world’s economic engine,” Seguin says. “Global trade accelerates global growth, creates new jobs and improves living standards. Free trade agreements between countries in Latin America, or any other region in the world, establish a regulatory framework that remove significant trade barriers and provide key economic opportunities for the businesses and citizens in each country involved in the agreement. With the removal of these barriers, new trade opportunities become available, which support the increased global competitiveness of a country’s economy.” Countries that have free trade agreements with the United States have generally increased their trade significantly upon entry into force of those agreements, Kotschwar points out. “This is true for Chile, Mexico and the DR-CAFTA countries — much more so for El Salvador and Honduras than for Costa Rica,” she says.

the incentives to improve two areas in which Latin American countries lag behind world standards: infrastructure and customs, according to Kotschwar. “Latin American countries, with the exception of Chile and Panama, rank very low on trade logistics indicators pertaining to trade transport infrastructure and customs efficiency,” she says. Seguin of UPS says the solution is easily available. “An increase in technology and pre-arrival information by local customs authorities throughout [Latin America] helps reduce the human element that handles both goods and information today and would help alleviate some of the fears that businesses have in reference to transparency,” she says. “Adoption of this type of regulatory framework would help reduce the cost of trade in [Latin America] from an average of 14 percent to 22 percent to the more typical 4 percent to 8 percent that exists in most first-tier trading partners, as well as the added benefit of increased levels of security and transparency — a true win-win situation.” Meanwhile, despite the rising number of free trade agreements, not all deals have been able to actually provide real cross-border free trade. “Often, higher protection hides behind non-tariff barriers and border-crossing requirements,” Cohen says. “For instance, 15 years had to pass before the United States accepted [that] Mexican trucks could come across and deliver freight to its side of the border. Sometimes barriers are abolished in trade agreements, but the border remains as a source of last protection.”

05-06/2011 LATIN TRADE

SPECIAL REPORT: TRADE & LOGISTICS

Latin Americaâ&#x20AC;&#x2122;s Free Trade Pacts NAFTA North American Free Trade Agreement Implemented in 2006 Members: Canada, Mexico, United States Combined GDP: $17,271.0 billion ($17.3 trillion) Combined population: 454.3 million

MEXICO FTAs with Bolivia, Canada (NAFTA), Chile, Costa Rica, Colombia (G-3), El Salvador, European Free Trade Association, Guatemala, Honduras, Japan, Israel, Nicaragua, Uruguay, United States (NAFTA)

CAFTA Central American Free Trade Agreement Implemented in 2006 Members: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, United States Combined GDP: $172.5 billion (Latin American members) Combined population: 48.7 million (Latin American members)

COSTA RICA CAFTA member, FTAs with Canada, China, Signed but not implemented: European Union

PANAMA FTAs with Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Singapore, Taiwan Signed but not implemented: European Union, United States Under negotiation: Colombia, Peru

LATIN TRADE 05-06/2011

SPECIAL REPORT: TRADE & LOGISTICS

COLOMBIA FTAs with Chile, El Salvador, Guatemala, Honduras and Mexico (G-3). Signed, but not yet implemented: Canada, European Free Trade Association, European Union, United States Under negotiation: Korea, Panama, Turkey

PERU FTA’s with Canada, China, Singapore, US Signed but not implemented: European Free Trade Association, European Union, Korea Under negotiation: Panama

CHILE FTAs with Australia, Canada, China, Colombia, Costa Rica, El Salvador, European Free Trade Association, European Union, Guatemala, Honduras, Japan, Korea, Mexico, Nicaragua, Panama, Peru, Turkey, United States

MERCOSUR Founded in 1991 Members: Argentina, Brazil, Paraguay and Uruguay Combined GDP: $2,519.4 billion ($2.5 trillion) Combined population: 243.7 million Trade agreements with the Andean Community and with Mexico for the automotive sector Under negotiation: European Union

Sources: Chile’s Foreign Ministry, Colombian Commerce Ministry, International Monetary Fund (2010 GDP in current prices), Korean Ministry of Foreign Affairs and Trade, Panama’s Commerce and Industry Ministry, Peru’s Foreign Trade Ministry, Population Reference Bureau (2010 population), Singapore Ministry of Trade, Latin Business Chronicle.

05-06/2011 LATIN TRADE

SPECIAL REPORT: TRADE & LOGISTICS

Freer Trade … with More Rules

With well over 100 trade agreements, Latin America is the freest trading region in the world, at least on paper. To benefit, very specific requirements must be followed that can challenge even the most organized and diligent companies. BY MARK A. LUDWIG

Porous income tax regulations, lax administration, ineffectual enforcement — these are just some of the struggles faced by many a Latin American government in an on-going quest to cover fiscal responsibilities. To provide a steady stream of revenue, most countries have come to rely on customs duties, value-added taxes and other charges levied at the border. These transactional taxes are far easier to administer, capture and enforce than income taxes. Indeed, goods don’t move if the tariffs aren’t paid. So significant are transactional taxes, sometimes referred to as “indirect” taxes, the World Bank estimates that, in some countries, they generate upwards of 40 percent of all tax revenues. The way in which these revenues are generated is a tax collector’s dream: Starting with the “CIF” value of imported merchandise — i.e., cost, insurance and freight — a cascade of import costs is set in motion. After calculating the first tax (usually a customs tariff ) on a product’s CIF value, another tax (usually a value-added tax) is then levied on that resulting basis, and so on. Throw in some port charges, customs fees and other miscellanea, and it becomes apparent that a good portion of tax revenue actually is generated merely by the fact that it’s calculated on top of other tax revenue. “In general, there is a high degree of complexity in the Latin American tax systems,” says Ed Godoy, an international tax partner for the Miami office of BDO USA LLP. “Businesses need to know their way around —otherwise they can come across some unwelcome surprises,” he adds. In Brazil, for example, the costs associated with importing a product made in Asia, Europe or the United States can increase the purchase price by 50 percent or more, readily turning a $100 international sales price into a $150 total landed cost. Double-digit customs tariffs, state VAT, and federal excise taxes are just some of the costs in the tax cascade that can wreak havoc with local competitiveness and profitability. Faced with such a reality, some companies accept the situation as the cost of doing business in these markets, while others seek to develop strategies to reduce costs here and now. Those adopting the latter approach usually take aim at one or several points along the tax cascade, seeking to enhance competitiveness through proactive planning. For some, the most direct path to reducing landed costs is through a free trade agreement, a process in which product sourcing decisions and supply-chain planning intersect with customs and international trade compliance. “The Mercosur economic union offers some reduced tax rates which have a direct impact on landed costs,” says Daniel Setz, Brazil country manager for Swiss-based freight forwarder Panalpina. “Mostly the automotive industry is using both Brazil and

LATIN TRADE 05-06/2011

Argentina as their production grounds, with respective exchange of raw, semi- and finished products, due to capacity constraints, diversification of production sides and use of already-existing infrastructure.” Meanwhile, free trade agreements also are becoming even more relevant as a cost-saver as international oil prices jump or remain high, says Romaine Seguin, president of the Americas division of UPS, the world’s largest package-delivery company. “As fuel costs continue to rise or remain at high levels, globally, the costs involved in transporting goods from countries in other regions, such as Asia, are offsetting the advantages of the low labor costs in these markets,” Seguin says. “For businesses looking to expand to markets outside of their country of origin, free trade agreements help to establish frameworks that present a viable operational structure for these businesses due to the cost advantages of selling to neighboring markets. “ However, although a free trade agreement may establish a window for trade between two countries, it does not guarantee that the necessary systems and infrastructure are in place in order to fully realize the potential of this agreement, she says. “Customs processes, physical infrastructure and several other factors greatly impact the supply-chain costs involved in the transportation of goods between countries in Latin America,” Seguin says. There are well over 100 trade arrangements within and among the countries in the Americas, and just about every country in the region participates in some type of preferential agreement designed to encourage economic growth and prosperity through trade. Among the principal trading arrangements are the North American Free Trade Agreement (NAFTA), the Common Market of the South (Mercosur), Andean Community, Central American Integration System and several dozen bilateral economic integration accords. In addition, an array of industry and sector-specific agreements between countries allow for duty-free or reduced-duty trade in various products, such as petrochemicals, photographic equipment and others. Considering their numbers alone, the network of arrangements in the Western Hemisphere arguably offers businesses many opportunities to lower total landed costs, increase market competitiveness and enhance profit margins through free trade. “Companies with an international manufacturing and distribution base for their products are well-positioned to leverage alternative sourcing scenarios to lower landed costs through free trade agreements,” says John Pitt, head of Global Customs at sports apparel and equipment company Adidas. “There’s no such thing as ‘free trade,’ just ‘freer trade’ with more rules.”

SPECIAL REPORT: TRADE & LOGISTICS

This statement often is heard from trade officials, academics and corporate executives when discussing the benefits and burdens of free trade agreements, and it certainly resonates with anyone tasked with figuring out how a business can benefit from them. Indeed, the surge in regional free trade agreements over the past two decades has added a high degree of complexity to the global trading system, with the boundaries of free trade increasingly defined by a litany of requirements, provisos, reservations, exceptions, exemptions, exclusions and a host of other conditions. Free trade, it turns out, is highly regulated. In view of this, for most companies the most relevant and important part to understand in a trade agreement is arguably the one on rules of origin. Rules of origin ensure that a third party is unable to unduly benefit from the preferential treatment members of an agreement grant to one another. At their core, rules of origin dictate what type and level of growth, processing or production activity an item must undergo for it to qualify for preferential access to the markets of member countries. In most cases, goods receive preferential access to the markets of member countries, provided that they are wholly obtained, grown or extracted within one or more of the agreement’s parties. Products such as grains, livestock, ores and organic chemicals are common examples. Preferential access also may be accorded if goods are processed such that they “shift” from one customs classification code to another within one or more of the member countries. Chemicals mixed to make paint, or car parts assembled to create an automobile, are examples in which a tariff shift might occur. Although the tariff-shift requirement is a staple of almost every free trade agreement, many Latin American trade agreements also provide for — and in some cases require — a third rule of origin. Known as the “substantial transformation” rule, this requirement can be employed for a product if the more basic rules of origin are not met. To measure whether something has been substantially transformed within the member countries, generally a value-content calculation is employed. The value content can be expressed in three main ways: as the minimum percentage of value that must have been added in the exporting country (domestic or regional value content, “RVC”); as the difference between the value of the final good and the costs of the imported inputs (import content); or as the value of parts, whereby originating status is granted for products meeting a minimum percentage of originating parts out of the total. If the RVC is at or above a threshold defined by the agreement, then the good is determined to originate and may benefit from preferential access to the other members’ markets. If Product Y in the example were manufactured in Mexico from both Mexican and globally sourced components, with its high regional-value content, it could possibly qualify for preferential access to the United States under NAFTA, Chile under the Mexico-Chile FTA, and Colombia under the “Group of Three” trade agreement, among other FTAs to which Mexico is a party. Of course, as many agreements also contain specific rules of origin, it is important to consider whether additional requirements must be satisfied for Product Y. “Meeting the rules of origin of the most stringent of the agreements out there does not mean that every other agreement will be

satisfied,” cautions Jeremy Page, a customs and international trade attorney with Chicago-based Page Fura P.C. “Every agreement has to be analyzed independently, given the specific and oftentimes unique origin rules.” Specific rules of origin are incorporated into FTAs to ensure that certain operations are performed and a level of value is added within the member countries. The fine print often requires that a certain amount of additional effort or value be added within the member countries. A particular manufacturing process might need to occur, for example, in addition to a certain value threshold being satisfied or a tariff classification changed. Occasionally, the rule is not presented in terms of an “either/or,” but in a combination of local operations and value add. “Some of the greatest challenges are the complexities of the rules in Latin American agreements, and they can place a tremendous administrative burden on companies for the opportunity offered,” Page says.

“Some of the greatest challenges are the complexities of the rules in Latin American agreements, and they can place a tremendous administrative burden on companies for the opportunity offered.” Jeremy Page, customs and international trade attorney with Page Fura P.C. in Chicago Further discipline is required in preparing the necessary documentation to present to customs authorities in the country of import once a product qualifies. Depending on the agreement’s rules, this documentation might include manufacturer affidavits, sworn declarations of origin, and almost always a certificate of origin. “The fact-gathering, analysis and reporting requirements demand a certain degree of diligence that some businesses are just not capable of supporting on a sustained basis,” Page says. Even with the complexity and associated bureaucratic burdens of an FTA, there can be substantial benefits available to participants that make the effort to decipher and apply the rules. Considering that multiple and high-rated transactional taxes, such as customs duties and value-added taxes, are applied to most imports into countries in Latin America, qualifying for a trade agreement can immediately free up working capital while driving significant and sustained savings into a company’s supply chain. Businesses that are proactive in the use of the many trade agreements available in the Americas can find themselves exactly where they want to be: at holding a competitive advantage over their industry competitors. —With additional reporting by Latin Trade staff in Miami.

Mark A. Ludwig, a contributing editor to LatinTrade and the moderator of LT CFO Events, is the founder and president of Variant Advisors, a customs and international trade consulting firm.

05-06/2011 LATIN TRADE

The Latin Trade Group inaugurated the 2011 series of its LT CFO Events on March 11 at the Four Seasons Hotel in Miami. More than 30 corporate finance professionals participated in the invitation-only seminar that offers executives from various industries in Latin America the opportunity to participate in high-level peer group discussions. Featured speakers addressed the economic outlook for the year, sustainable working-capital strategies and the metrics that matter the most when measuring performance. Latin Trade Contributing Editor Mark Ludwig, who is president of customs and trade consultancy Variant Advisors and is also the contributing editor of LT CFO events, moderated the presentations and discussions. The March seminar began with an overview of the regional economic outlook. The recovery underway in Latin America and the United States is strong now but could be hurt should oil prices continue to rise, says Kathryn Rooney Vera, director of macroeconomic research at Bulltick Capital Markets. Oil exporters Venezuela, Colombia and Mexico are “net winners” in the current environment, Vera says. In Chile and Peru, the impact of higher petroleum prices has been offset by the large amounts of mineral ores, like copper and gold. With oil at $100 a barrel, Brazil’s economy will continue to grow, Rooney Vera says. She cautions that while Brazil “is facing some intense inflationary pres-

LATIN TRADE

05-06/2011

sures, not only from imported inflation from high commodity prices like iron ore. But also because of internal pressures such as wage inflation.” She sees $140 a barrel for West Texas Crude as the make-or-break level for many economies. “In 2008, that was the trigger point,” Rooney Vera says. “In my view, that would be a huge tax on consumption. You’d see companies having to pass along costs in some way.” The second part of the event showcased sustainable working-capital strategies. Latin Americans are spending more on consumer goods, says Raul Lamus, vice president of finance and administration, South & Central America, for Amcor, a manufacturer and distributor of a broad range of packaging, supplying the beverage, food, healthcare and other industires. “Sales volume is growing organically. So working capital, unless it’s very controlled and minimized, becomes an obstacle for growth,” Lamus says. Amcor actively manages its receivables, payables, and inventory levels, along with a foreign-exchange hedging program to keep working capital at optimum levels, Lamus says. Paolo Giacomini, J.P. Morgan’s executive director — Treasury Services Advisory LATAM, highlighted efforts by his firm to help clients reduce their days sales and days payable outstanding levels. “If you are more efficient at releasing information from customers, for instance, or releasing it from your factory and getting it to your

customer more quickly, you can improve your cash conversion cycle,” he says. The last panel focused on peformance measurements. Cheryl McDowell, vice president of finance & operations, Americas, at Oracle, says the software company created a “CFO dashboard” that allows executives to constantly monitor cash-flow positions. “We went through and centralized everything, with one big massive computer, and a central location where we have all our data, instead of in a bunch of different countries,” she says. “We went through a major transformation that was all about cost savings.” Global process “owners” facilitate automating Oracle’s payables and receivables management, McDowell says. These employees “try to improve the processes of everything we do. When a tax law change occurs in a country, it goes through this group,” she says. “They look at how we’re going to adjust.” Frank Martien, partner at First Annapolis Consulting, says purchasing cards are a key element to automating payments. Martien said the “p-card” usage is relatively low in Latin America compared to other regions, which he attributes to local tax laws and a lack of awareness at the banks and among suppliers of goods. Organizations like BASF and Intuit are looking to globalize their p-card programs, which will increase their use, Martien says: “They’ll have to educate their suppliers.” — Jeff Yastine

PHOTOS: ALEX GORT

LT CFO EVENTS MIAMI

LT CFO EVENTS MIAMI 3

1 4

1. Frank Martien, partner, First Annapolis Consulting; Cheryl McDowell, vice president of finance & operations Americas, Oracle Corporation; Mark Ludwig, LT CFO contributing editor, Latin Trade Group. 2. Alfredo Carrasco, vice president of finance, Tech Data Latin America Sales; Luis Brito, CFO, Turbana Corporation; Javier Aguirre, EVP and CFO, Cisneros Corporation. 3. Raul Lamus, vice president of finance and administration, South & Central America, Amcor. 4. Paulo Giacomini, executive director — Treasury Services Advisory LATAM, J.P. Morgan. 5. Latin Trade CFO Roundtable. 6. Emilio Fortou, head of LAC Multinational Program, Visa; Elena Piubel, CFO, Heinz; Diego Rodriguez, head, Commercial Solutions LAC, Visa; Laura Maydon, Large & Middle Market Commercial Products, Visa. 7. Kathryn Rooney Vera, director, macroeconomic research, Bulltick Capital Markets. 8. Oliver Harmann, CFO, Volkswagen Group Latin America, Inc.; Scott Moore, managing director, finance, Hewlett Packard Co. Latin America. 9. Sean Clifford, regional controller, Chartis; Tara Powell, executive director, J. P. Morgan; Tony Patti, regional treasury manager, Chartis; Mike McKenzie, managing director, head of Treasury & Securities Services for Latin America, J.P. Morgan.

05-06/2011 LATIN TRADE

BRAVO COUNCIL CALGARY 1

3 4

6 1. Enrique Garcia and Jane Bussey, editorial director, Latin Trade Group. 2. Ramiro Crespo, president, Analytica Securities; Oscar Jasaui; Bernardo Guillamon, advisor to the Ofﬁce of Outreach and Partnerships, Inter-American Development Bank. 3. Pierina Correa, director, Fundación Abriendo Caminos (Ecuador); Enrique García, president and CEO, Corporación Andina de Fomento (CAF). 4. Simon Strong, senior managing director, FTI Consulting; James Quigley, executive vice chairman, international corporate and investment banking, Bank of America Merrill Lynch; Oscar Jasaui, President, Paciﬁc Credit Rating; Martin W. Schubert, chairman, InterAmerican Finance Corporation. 5. Shane Jaffer, director, International Financial Institutions, Government of Alberta, Canada. 6. Raul R. Herrera, partner, Arnold & Porter LLP.

a region confronting the need to build for the future, the Corporación Andina de Fomento — a 40-yearold regional development bank — has long been on the forefront of funding infrastructure projects. But private-sector investment and innovative financing, such as special funds for infrastructure, also are necessary to foster development in the region, says Enrique García, the president and CEO of CAF. García was the keynote speaker at the Latin Trade Group’s BRAVO Council, held on March 27 in Calgary, Canada,

LATIN TRADE

05-06/2011

during the annual meeting of the InterAmerican Development Bank. Addressing a group of bankers, financial analysts and development specialists, García said Latin America and the Caribbean are an economic success story. But he cautioned leaders and policymakers to avoid complacency since countries faced major challenges, not only in terms of investing in infrastructure but also in reducing poverty and inequality. “Infrastructure is a key component in development and Latin America is not doing very well in that,” García said, adding that infrastructure investments in Latin America equaled just 3 percent of

the gross domestic product in the past decade, while Asia’s rate was 10 percent. Ideally, Latin America and the Caribbean would try to double the amount of investment on infrastructure, García said. The CAF, which has approved more than $10 billion in loans for development, including infrastructure projects, focuses not only on the finances of the projects but also on their quality, from economic returns to environmental concerns to future maintenance, García emphasized. García urged nations to use technology, innovation and creativity to build their competitive advantage and not to depend so heavily on commodity exports.

BRAVO COUNCIL RIO DE JANEIRO 1

7 1. Woods Staton, CEO, Arcos Dorados. 2. Frank Holder, chairman for Latin America, FTI Consulting. 3. João Carlos Ferraz, director, BNDES. 4. Donna Hrinak, vice president, Global Public Policy and Government Affairs, PepsiCo. 5. Richard Burns, chairman, Latin Trade Group; Robert H. George, partner, Curtis, Mallet-Prevost, Colt & Mosle LLP; Cristiana Falcone, consultant to the Ofﬁce of Outreach and Partnerships, InterAmerican Development Bank. 6. Marcos Antonio Molina, CEO, Marfrig Alimentos; Ricardo Bomeny, CEO, Brazil Fast Food Corporation. 7. Woods Staton with BRAVO Council attendees.

usiness opportunities and challenges in the decade of Latin America was the topic of the BRAVO Council held April 29 in Rio de Janeiro on on the sidelines of the World Economic Forum Latin America. Woods Staton, CEO of Argentinabased Arcos Dorados, was a guest speaker and was joined by Frank Holder, chairman for Latin America at FTI Consulting, and João Carlos Ferraz, director at Brazil’s development bank BNDES. “I’ve been working in Latin America for more than 25 years,” Staton said. “I’ve never felt more positive than I do today.

There’s a lot going on, starting with the governments [which] are more fiscally responsible [and showing more respect for the] rule of law. That’s great.” Apart from Brazil, Staton singled out Colombia, Panama and Peru as strong growth economies. In terms of key challenges, education stands out, he said. “One of the key challenges we have in Latin America is education,” Staton said. Holder concurred with Staton on the positive outlook for Brazil, Colombia, Panama and Peru, but he included Costa Rica on his list of the “hottest” economies in Latin America. In many other countries, however, investors have been deterred by inadequate

protections for their investments, he said. Meanwhile, corruption remains a major challenge throughout Latin America, he said. “We could grow much faster if not for those problems,” Holder said. Holder also shared Staton’s optimism about Latin America’s economic outlook. “It would be very hard to imagine a scenario with a crisis like we had in the past,” he said. Marcos Antonio Molina, CEO of Brazilian meat packer Marfrig Alimentos SA, said his greatest challenge was the weak U.S. dollar. The dollar has dropped 40 percent compared to the Brazilian real over the past two years. —Joachim Bamrud

05-06/2011 LATIN TRADE

BEST OF TRAVEL 1

Latin Trade presented award certiﬁcates to hotel and airline executives whose properties and companies were rated the best in Latin America by participants in the magazine’s annual business travel survey. The travel survey has been featured in the magazine since 2003, most recently in the January-February 2011 issue. Visit latintrade. com for the complete results of the latest survey. 1. Joachim Bamrud, executive editor, Latin Trade Group, and Alvaro Diago, COO, InterContinental Hotels Group, Latin America and the Caribbean. 2. Trip Barrett, vice president, brand management, Latin America, Starwood Hotels & Resorts, and Joachim Bamrud. 3. Joachim Bamrud; Danny Hughes, senior vice president, Caribbean, Mexico and Latin America, Hilton Worldwide; and Maria Lourdes Gallo, executive director, Latin Trade Group. 4. Fernando Fernández, vice president development Americas, Sol Meliá, and Joachim Bamrud. 5. Martha Pantin, director, corporate communications, American Airlines, and Maria Lourdes Gallo.

LATIN TRADE

05-06/2011

TECH TRENDS Brazil Invoicing Goes Digital How one technical solution enables companies in Brazil to comply with new regulations and save time. A shift to automated electronic invoicing in Brazil has produced unexpected efficiencies in a complicated process, according to Germany-based SAP, the world’s largest business software producer. SAP launched software for companies to comply with Brazil’s Nota Fiscal Eletronica two years ago. The Brazilian government had instituted a gradual rollout of compliance deadlines, by industry, and the rules apply to every domestic sale and every domestic shipment of goods or materials. Smaller companies are exempt from the electronic requirement. Two years after the launch, with all industries now covered, SAP has about 300 customers actively using the systems, says Michael Depner, vice president of globalization services for SAP Labs Latin America. SAP did a case study with one of those customers, Robert Bosch Ltda., an automotive supplier. The old manual system took about eight minutes to process, but the automated software cut that to just one minute. The original trigger to implement the software was the legal requirement, with the time savings an added benefit, Depner says. In addition, “it is more accurate because you avoid errors of human intervention.” In the case of Bosch, the shift to electronic invoicing also has simplified handling returned materials or parts, all of which were formerly paper-driven processes. SAP’s client base for the Nota Fiscal Eletronica product ranges from national industrial heavyweights, such as Petrobras and Vale, to major multinational consumer-products makers, such as Procter & Gamble, Depner says. Brazil is unique in a region where three other countries have moved to electronic invoicing, Depner says. “All the legal and fiscal requirements are integrated into one document. That

makes Brazil so complex,” he says. “In Mexico, Argentina and Chile, the requirements are different but comparable.” The stakes are high in Brazil. Every nota fiscal, or invoice, must be in the governmentspecified format, validated and sent to the Ministry of Finance (SEFAZ) for approval. If the address information does not match SEFAZ master data, that data must be corrected before an invoice can be issued. Crossgate, a business-to-business IT company in which SAP has a stake, worked with Kellogg Brasil in 2010 to clean its master data and be ready in all of six weeks. On January 1, Mexico began to require that companies’ systems were integrated with the tax authorities for real-time ap-

proval of electronic invoices. As complex as Brazil requirements are, Mexico presents its own challenges, says Crossgate CEO Scott Lewin. “Most companies we work with in Brazil have gone through the rigorous process of altering their ERP [Enterprise Resource Planning] systems and business processes by the time they come to us to integrate with the SEFAZ,” Lewin says. “In Mexico, all of these work streams are typically converging at the same time.” Thus far, Crossgate has worked with 11 global companies to fulfill the Mexican requirements. —Mary Sutter

05-06/2011 LATIN TRADE

ON THE ROAD

A practical guide for business travelers to the Colombia capital.

—BY JOHN OTIS

BOGOTA – Colombia’s capital, Bogota, is seeing record numbers of business travelers as a result of its fast-growing economy and growing interest among foreign investors. The most convenient areas for hotels and restaurants are the uptown Bogota areas including the banking district, the Zona Rosa, La Cabrera and Chico. These neighborhoods are located roughly between Carreras 7 and 15 and Calles 72 and 100. Bogota addresses are reasonably logical, with carreras, or avenues, running north-south routes. Streets, or calles, run east to west. Options in the uptown neighborhoods include boutique hotels like the Casa Medina and the Charleston Hotel as well as international chains such as Sofitel, Marriott and Radisson. Travelers who will spend time at government ministries should consider staying closer to the old downtown at the Crowne Plaza Hotel Tequendama or the boutique Hotel de la Opera, located across the street from the Foreign Ministry and a few blocks from Congress and the national palace. Both Marriott and Radisson have opened new hotels on El Dorado Avenue near the CAN — Centro

LATIN TRADE

05-06/2011

Administrativo Nacional — which is home to many government ministries. Most hotel room fees include breakfast. Colombian coffee can be surprisingly bad due to poor preparation. But good espresso and cappuccino can be found at the many Juan Valdez and Oma coffee shops around the city. Many restaurants offer decent international cuisine though it’s rarely outstanding. For typical Colombian cuisine, such as lomo al trapo — beef tenderloin packed in salt, wrapped in a wet rag, then cooked in charcoal — try La Bonga del Sinú or Andrés Carne de Res. The latter’s Chía location, north of Bogota, is also a lively party spot. For a taste of Colombian Caribbean cuisine, try Gaira, owned by vallenato music star Carlos Vives, or La Fragata. At fine restaurants, always call ahead for reservations. A 10 percent service charge is included in restaurant bills, and no further tips are expected. Some Bogota restaurants that are open for lunch close in the evenings, but bars stay open into the wee hours. SAFETY Bogota has become much safer over the past decade, but travel-

TRANSPORTATION If you don’t have a driver waiting for you upon arrival, proceed to the official airport taxi office, located to the right of the terminal exit doors, which will provide tickets with set fees to be paid to the cab driver upon arrival. The fee to most Bogota hotels is about 20,000 pesos, or roughly $11. Renting a car is not recommended for business travelers because the “pico y placa” license plate system bars private vehicles, including rental cars, from the streets two days per week. Taxi services abound, but a request for a cab should be phoned in from a hotel or office 15 minutes in advance. All taxis are metered, and tips are voluntary. Due to frequent rains, potholes and street repairs, traffic jams are getting worse, especially during rush hour. As a result, it’s easier and faster to schedule meetings between 10 a.m. and 3 p.m. Allow at least 30 minutes to get to meetings. It may be faster to walk to meetings at nearby addresses. Keep in mind that weekend traffic is also heavy because the license plate restrictions are not in effect and many residents run errands they didn’t get to during the week.

Meetings and Negotiations: Meetings should be set up as far in advance as possible for the highest-ranking executives and with a minimum of two weeks’ notice for others. Email or telephone confirmation a few days before the meeting date is highly recommended. Meetings are sometimes organized around lunch dates at private clubs where a cocktail or a glass of wine is appropriate. Many members of the business class own second homes near Bogota where they often host weekend lunches and cookouts at which the dress code is casual. Follow up with thankyou notes within a week. Dress Code: The dress code for Bogota business meetings is formal, meaning business suits and ties. The weather can be chilly and rainy (mornings are usually sunnier than afternoons), so it’s a good idea to pack an umbrella and a sweater. Greetings: Business contacts should be addressed in Spanish as “doctor,” “ingeniero” or “licenciado” depending on the individual’s specialty and field of study. Business cards: Acceptable in either English or Spanish. Language: Though most members of the Bogota business class have studied English and traveled to the United States, their spoken English ranges from very rough to fluent. It is imperative for English-only travelers to find out in advance whether the meeting will be conducted in Spanish and, if so, to arrange for a translator. Some Bogotanos speak Portuguese or French, though it’s not common. Punctuality: Business executives are, in general, far more punctual than government officials.

PROEXPORT COLOMBIA / MAURO FUENTES

BOGOTA

PRACTICAL TIPS ers can be easy marks. Stick to withdrawing cash at ATMs with security guards. In the evening hours, strolling in many uptown neighborhoods is relatively secure, although there’s always more safety in numbers. Many hotels have their own fleets of taxis, which are more expensive than street cabs. Avoid hailing taxis on the street since passengers are sometimes robbed by cab drivers. If there’s no alternative, it’s generally safer to hail a moving cab rather than taking taxis that are parked and waiting outside fine restaurants and hotels frequented by foreigners.

ASK THE CONCIERGE

LT GUIDE: BOGOTA HOW TO GET THERE: All international flights land at El Dorado International Airport. All the major Latin American and U.S. carriers – including Avianca and merger partner TACA, LAN, TAM, American, Continental, COPA – serve the Colombian capital as do European carriers Iberia, Air France and Lufthansa (the German airline had suspended service in 2002 and restored it in October 2010). Discount airlines flying to Bogota include Gol, jetBlue and Spirit. WHERE TO STAY: Crowne Plaza Tequendama-Bogota This uptown property is just one block from the planetarium and near museums. Carrera 10 #26-21 Tel. 57-1-382-0300 Embassy Suites by Hilton Bogota Rosales An option in the Chapinero district, near the Universidad Nacional de Colombia. Calle 70 #6-22, Bogota Colombia Tel.: 57-1-317-1313 Hotel Casa Medina The 58-room boutique, part of the Charleston chain, is a designated cultural monument. Carrera Septima # 69 A-22 Tel.: 57-1-217-0288 Hotel de la Ópera A boutique property (29 rooms) across from the Foreign Ministry. Calle 10 # 5-72 Tel.: 57-1-336-2066 JW Marriott Hotel Bogota This new hotel has earned accolades for service and elegant amenities. Calle 73 #8-60 Tel. 57-1-481-6000 Radisson Royal Bogota Hotel Also new in Bogota, located at the Teleport Business Park. Calle 113 #7-65 Tel.: 57-1-629-5559

Sofitel Bogota Victoria Regia Luxury property in the heart of the Zona Rosa. Carrera 13 #85-80 Tel.: 57-1-621-2666

The JW Marriott Bogota, which opened its doors in July 2010, was only the second Marriott in all of Colombia. The property gets high marks from business travelers, who ranked it as the No. 1 hotel in Bogota in Latin Trade’s annual reader survey.

WHERE TO DINE: Andres Carne de Res Parrilla served in a lively and fun environment. Calle 82 #12-21 Tel.: 571-863-7880

Interview with Daduis Santiago, Chief Concierge JW Marriott Bogota

Astrid y Gastón The Bogota branch of Peruvian chef Gastón Acurio’s chain, serving Novoandina cuisine. Carrera 7 #67-64 Tel.: 571-211-1400 Gaira Local cuisine at a hot spot owned by vallenato music star Carlos Vives. Carrera 13 # 96-11 Tel.: 57-1-636-2696 Harry Sasson International cuisine, with an emphasis on meats. Calle 70 #5-57 Tel.: 571-321-3640 La Bonga del Sinú Authentic Colombia cuisine. Carrera 14 # 93A 88 Tel.: 57-1-691-9507 La Brasserie French bistro fare in the Zona Rosa. Carrera 13 #85-35 Tel.: 571-257-6402 La Casa Vieja Traditional and local specialities with three locations in the city. Avenida Jimenez # 3 – 63 Tel.: 571-342-6752 La Fragata Fish and seafood, also with three locations around the city, including one at the new Radisson. Calle 100 #8 A-55, Piso 12 Tel.: 57-1-616-7461

What restaurant would you recommend for a professional lunch or dinner? La Mina Restaurant (1-4816000), here at the hotel, is known in Bogota for its great steak and imported lobster. Andres Carne de Res is a must. You will enjoy traditional Colombian food, dancing and festivities all night long. There are two locations, one in Bogota proper (1-863-7880) and a second in the city of Chía, about 30 kilometers north of the capital. I have 24 hours in Bogota. What itinerary would you recommend in order to impress a client? Stroll around the historic center, with its many beautiful colonial structures and important government buildings like the Congress, the Supreme Court and the Casa de Nariño, which is the presidential residence and office, as well as the Palacio Liévano, which is the mayoral seat. I also recommend the Gold Museum for its collection of pre-Colombian treasures, among them the famous Muisca Raft. You cannot leave Colombia without visiting the Salt Cathedral of Zipaquirá, our most famous church, built within the tunnels of a salt mine 200 meters underground, near the town of Zipaquirá. This cathedral receives as many as 3,000 visitors on Sundays and is an important part of Colombians’ cultural, environmental and religious patrimony. What are the must-buys in Bogota, if I were to bring something home? You definitely must buy Colom-

bian coffee. Juan Valdez or OMA coffee are excellent options, well known for their aroma and flavor. You may also consider Colombian emeralds, which are internationally recognized for their quality and beauty. If you would like a handmade souvenir, a “Vueltiao” hat or hammock are great examples of local craftsmanship. What safety measures do you recommend people take when they visit Bogota? You should follow the same preventive measures you would take when visiting any other important metropolis in the world, such as not wearing glitzy jewelry and making sure you use transportation services endorsed by the hotel. I have many meetings in the city. What is the best way to get around? Use certified transportation services available at our hotel, or at any other major hotel in the city. What is the appropriate amount to tip a taxi or other driver and in restaurants? A tip of between 10 to 20 percent of the bill or fare is appropriate for both restaurant services and for drivers. What is the most unusual request that you have received from a guest? A guest asked to see an exhibit by the painter Olga de Amaral, but at the time, there were no gallery shows of her work. I was able to get the guest an appointment with the artist, who gave the guest a personal tour of her paintings in her own home. The guest was extremely surprised yet thankful to have the unique opportunity to meet the painter.

05-06/2011 LATIN TRADE

MADE IN

Brazil

razil is the world’s top producer and exporter of orange juice. It mainly exports to Europe but also successfully supplies the United States, where Brazilian juice supplements significant domestic production. Americans purchase a substantial amount of Brazilian juice — about 14 percent of the total exported in 2010, based on value — but Brazil had been pursuing a complaint filed in 2008 with the World Trade Organization over tariffs imposed by the United States, which had accused Brazilian exporters of dumping, or selling at unfairly low prices. In March of this year, the WTO issued its final report, stating that the U.S. method for calculating dumping prices was illegal, a victory for Brazil. Brazil’s orange-juice export industry is concentrated, like its product. The Brazilian Association of Citrus Exporters, the trade association also known as Citrus BR, calculates that four companies — Cutrale, Citrosuco, Citrovita and Louis Dreyfus — are responsible for 97 percent of exported juice. The industry’s best year was 2007, when the value of exports jumped to $2.3 billion, an increase of nearly 35 percent over the previous year, according to Brazil’s Secretariat of Foreign Trade. The value of exports then declined for two consecutive years before recovering some lost ground in 2010, when Brazil exported $1.8 billion

in orange juice, up 9.6 percent versus 2009. Most Brazilian orange juice is exported as frozen concentrate, and the most important consumers are Europeans. About 70 percent of the total exports leave the Port of Santos to cross the Atlantic in juice tankers, heading to specialty terminals in the ports of Ghent, Belgium, and Rotterdam in the Netherlands. Europeans also are driving an increase of exports of not-fromconcentrate orange juice, says Christian Lohbauer, president of Citrus BR. On a volume basis, that juice accounts for half of total orange-juice exports, he says, but it requires six times the storage capacity of frozen concentrate. With the shifts in the economies of Eastern Europe, including Russia, those countries are consuming more orange juice, although not enough to have a discernible impact on Brazilian producers, Lohbauer says. Tastes in those countries also run more to nectars — juice-based drinks with added water and sugar — versus unadulterated juice. “It takes time to change habits,” he says. Brazilian juice has gained traction in Asia. About 12 percent of Brazil’s frozen concentrate was shipped to Japan in 2010; however, the Japanese drink only one-fourth of that. Like Belgium and Holland in Europe, Japan, along with Australia, has bulk terminals and is a key trans-shipment point to other Asian markets. China has become the world’s largest producer of citrus fruit, yet Brazil still grows more oranges and will likely remain the most important exporter for some time, given that Chinese fruit is largely consumed domestically.

Annual Exports

Top Markets

Frozen concentrate and equivalent

Exports of frozen concentrate and equivalent

Year 2006 2007 2008 2009 2010

Market EU & Switz. United States Japan China South Korea

Value $1.5 billion $2.5 billion $2.0 billion $1.6 billion $1.8 billion

All figures in U.S. dollars Source: Brazilian Secretariat of Foreign Trade (Secex)

LATIN TRADE

05-06/2011

Value $1.3 billion $246.1 million $85.1 million $73.9 million $20.0 million

—Mary Sutter

Top Drinkers

Annual per-capita consumption, in liters* Change 11.7% 1.7% -2.6% 20.2% 21.3%

Notes: Value in U.S. dollars in 2010. Change versus 2009. Source: Secex

United States Canada France Germany United Kingdom Netherlands

17.2 16.7 14.9 13.1 12.6 11.2

*2009 figures reflect all sources of orange juice Source: Brazilian Association of Citrus Exporters

ISTOCKPHOTO

Orange Juice

WHAT MATTERS TODAY

Confidence To operate at peak performance, today’s treasury professionals require clear visibility into cash positions, trust in their global operations and a forwardlooking approach to risk. J.P Morgan can help, by providing the products, advice and confidence to conquer the most daunting challenges. Our clients benefit from our global reach, local experience and flexible treasury product solutions—all supported by outstanding service and market– leading technology.

:8J? D8E8><D<EK KI8;< C@HL@;@KP :FDD<I:@8C :8I; <J:IFN J<IM@:<J

FOR MORE INFORMATION, visit us at: jpmorgan.com/ts or jpmorgan.com/latinamerica.