Why Multi-Latinas Are Winning

In 1999, less than half of the largest 500 companies in Latin America were homegrown. By 2007, Latin American firms commanded three out of every four positions in the regional top 500. Today, multi-Latinas, armed with cash, are stepping out of their comfort zone and taking control of debt-laden firms in Europe and the United States.

Carlos Slim’s two acquisitions in May –a 28 percent stake in KPN, the ailing Dutch telecom, and all of California-based Simple Telecom– are telling examples.

What is behind the success of Latin America’s private sector? It is a vexing question for multinationals, anxious to deepen their footprint in the region but often stymied by local competition. Many multinationals fell asleep at the wheel between 2001 and 2007. American firms retreated in the aftermath of the 9/11 attacks. European firms, burned by the Argentine crisis, also retreated. Globally, companies shifted their focus to China. While the world neglected Latin America, multi-Latinas pulled off their Reconquista.

Most consumer-oriented multinationals have limited their focus to the ABC+ socio-economic strata, or about 15 percent to 20 percent of the population in Latin America. By contrast, several local firms pursued consumers at the base of the pyramid long before it was a trendy strategy. Natura, Brazil’s largest cosmetics firm and the seventh largest in the world, enjoys unrivaled penetration in its home market. Their products are sold to women in far-flung towns and villages across the country, not to mention the 40 cities in Brazil with more than 500,000 inhabitants. America Movil eclipsed many of its rivals by offering pre-paid cellphone cards to the millions of Latin Americans who had no credit history but yearned for a phone. Electra, the Mexican retailer, offered credit to the unbanked by ta-king car titles as collateral, and payment in the form of in-bound remittances so the working class could buy a stove, fridge or color TV. In its early growth phases, CEMEX offered single cement sacks to small builders and DIY home builders who constructed one room at a time because they lacked credit.

Meanwhile, many multinationals are daunted by the logistical and marketing challenges of distributing their products beyond the region’s large cities. One fixture in rural or small-town Mexico is the Bimbo delivery truck that brings fresh bread and confectionery to almost every community in the country.

Knowing that they could never build a national network like MultiPack’s in Mexico, FedEx decided to buy the company rather than compete with it.

Some of the largest players in the region like Vale in Brazil or CEMEX from Mexico were able to achieve monopoly-like status in their home markets, hoard cash and then break out and purchase assets abroad. The enviable negotiating position of Vale as the world’s largest iron-ore exporter enabled them to extract massive price hikes from a very fragmented Chinese steel industry.

CEMEX’s formidable profit margins, aided by the most sophisticated information technology infrastructure of any cement company, gave them the cash and equity capital positions to buy firms abroad. CEMEX was ahead of its peers when it began buying companies in other emerging markets outside Latin America, countries like Indonesia, the Philippines, Bangladesh, Poland, Hungary, Latvia and the United Arab Emirates. But some of Latin America’s most successful companies are also accused of breaking the rules in their pursuit of growth. Telmex was slapped with a $1 billion fine in 2011 by Mexican regulators for allegedly charging uncompetitive interconnection rates. The Inter-American Development Bank has blacklisted dozens of Latin American firms for fraudulent and corrupt practices, a large portion of which are related to public sector bids.  Many Latin American firms have devised ways to circumnavigate the region’s outdated and onerous labor laws. In several Latin American jurisdictions, full employee rights (including severance, paid holidays, health insurance and pension matching) do not kick in until a 90- to 180-day trial period has been completed. In labor intensive sectors, local employers often oblige employees to sign temporary contracts that are torn up and rewritten just before the employee is eligible for full employment benefits. Some multinationals undoubtedly play these tricks too, but given the extra scrutiny they receive from regulators in-country as well as back home, they tend to be more compliant with both the letter and the spirit of labor laws.

In spite of some questionable practices still pursued by select multi-Latinas, their success offers many lessons to multinationals. Multinationals have spent decades teaching Latin Americans their methods. The time has come for the teachers to start listening to their students.

John Price is the managing director of Americas Market Intelligence and a
20-year veteran of Latin American competitive intelligence and strategy consulting.

jprice@americasmi.com

 

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About the Author: John Price is the managing director of Americas Market Intelligence and a 20-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com.

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