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Argentina SMB’s: Survival Challenge 

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Argentina’s small and medium-sized companies now face a challenge for survival.

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“Let us act rapidly, or the crisis could turn into a catastrophe.” These words from the new U.S. president, Barack Obama, do not provide much encouragement for a positive outlook this year. The world’s most influential country has entered a recession in which it has already lost more than three million jobs. This has very significant implications for a country such as Argentina, which is also suffering from the aftershock of the chaos.

INTERNAL PROBLEMS

There are a host of serious internal problems: The deceleration of the economy, which grew at 7.1 percent during the second half of 2008, the lowest rate in the last six years, according to the National Institute of Statistics and Census; a crisis in rural areas, which lost more than $12 billion as a result of drought and lower commodity prices; a decline in consumption, and the possibility of increased layoffs. According to official data, the unemployment rate is 7.3 percent  and could reach double digits later this year. Some factories have already laid off some of their workers because of the decline in activity, or they have asked their employees to take their vacations ahead of schedule.

Sales of autos, appliances and furniture have fallen, prompting the government to launch plans to stimulate consumption by letting consumers trade-in their refrigerators and ovens for new ones, or finance new cars on more favorable terms.

The manufacturers most affected are small and mid-size companies, which generate almost 90 percent of all jobs in the country. Although there are no concrete statistics, Sepyme, the agency for small and medium-size enterprises and regional development, calculates that there are 1,550,000 such companies, of which 71 percent are based in the province of Buenos Aires. Sepyme classifies companies according to their average annual sales over the last three years, with levels that vary according to the business sector the firm is in. Thus, a service provider that bills less than $135,000 is considered a micro-enterprise, while a construction firm that generates sales of less than $7,000,000 is classified as a mid-size company.

INVESTMENT POSTPONED

There is a long list of such companies, according to Enrique Déntice, a researcher at the San Martin National University. “When every sector sees a contraction in demand, high domestic interest rates (of at least 20 percent), prices that do not give you a margin, and lower profitability, then the challenges are significant. Uncertainties and a lack of confidence combine to postpone investment projects, so that profitability suffers the most and one’s own financing plays a much more important role in development.”

Jorge Colina, a researcher in the Argentine Catholic University’s school of economics, says these problems affect both those companies that export and those that serve the domestic market. “The Argentine business cycle depends heavily on the cycle of international trade. Statistics support the notion that Argentina does well whenever international trade is favorable, and vice versa. In this sense, when foreign trade makes expansion of the economy possible, every company benefits; and when external conditions turn adverse, both kinds of companies [exporters and non-exporters] suffer declining sales. As a result, in a recession, both types are affected.” Colina adds, “The challenge is clearly to confront, with relative success, the drop in sales, in order to retain customers and find new ones.”

This reality is clearly evident in the case of IBL, a small Buenos Aires company that has provided logistics services to industry and agribusiness ever since 2001. The current priorities of Jose Maria Kugler, chief executive of the company, are to retain customers and find new ones, as well as take advantage of opportunities that other companies leave behind. “Our company is in a period of growth both in sales and operating capacity. This means, while using the current structural base, we are going to incorporate goods and technologies that enable us to maximize the use of our capacity as well as to lower the impact of fixed costs.”

More specifically, IBL will look to “achieve better utilization rates of fixed infrastructure; bring in [capital] goods to increase the warehousing capacity of its operations center; eliminate non-critical expenditures; bring in key personnel; and give a strong boost in the arena of sales.”

GOVERNMENT ROLE

The government of President Cristina Fernández de Kirchner has gone through a difficult year marked, among other problems, by the conflict over rural work stoppages(protests began on March 11, and lasted over 100 days). Martin Lousteau, then Minister of Economics, wanted to raise the country’s quota of agricultural exports from a fixed 35 percent to a maximum of 44 percent, using a scale that would fluctuate according to international commodity prices. There was also a case of corruption, involving the discovery of a suitcase containing $800,000, which arrived illegally for the presidential campaign. There were labor union problems, involving constant demands for salary increases. And then there was the fall of the financial system, leading to an aggressive strategy involving numerous announcements at the beginning of 2009.

One of the first measures was the creation of a Ministry of Production, dedicated to softening the impact of the economic crisis and to promote investment, especially in smaller companies. Another important decision was to designate some $170 million in funds from ANSES (Argentina’s social security administration) to provide loans to small companies and auto manufacturers. This money was provided via public and private banks, but so far the results have not been very visible since few companies have been approached, and few have made the decision to take out a loan.

According to Déntice, “The measures adopted by the government are necessary, but are still viewed as insufficient. They are directed more to the end of the production chain than at addressing the development and internal workings of companies. Nevertheless, we’ve had only a very brief period to evaluate them, and people are waiting for them to catch on in the sector. The expectations of small companies will be to watch and wait, especially to see what the big companies do.”

TRANSITORY

Colina argues that it is not important to watch and see how focused the new measures are on small companies. “They [the measures] are transitory. Analysis should look at how effective these measures can be in maintaining the [overall] level of activity. For a small company, a specially promoted loan is not sufficient if sales fall and costs get out of control. So the important thing is how overall economic activity proceeds, and what are the general conditions for production. In that regard, the subject of labor and taxes (whether by lowering the social burden for companies or reducing taxes) is more important than measures aimed at specific sectors.”

Kugler, the CEO of IBL, is concerned about the pace of the economy, which is the key to planning his business. “I believe that the global and local economic crisis will have a major impact during the first half of this year. We understand that in certain sectors where we are active the crisis will be transitory, but in others it will be very deep and it will continue for a prolonged period. We need to be very attentive to pursuing those industrial sectors vigorously.” As for the measures proposed by the Kirchner administration, Kugler thinks that they are interesting and would be very useful “if they really were to be carried out. However, we see that the government lacks the capacity to carry out the policies it defines in ways that are concrete and rapid.”

SHORT-TERM GOALS

Although the market awaits improvements in the domestic and global economy, decisions have to be made over the short term. However, this is a year when there are legislative elections in Argentina; experts say that fact could lead companies to delay their decisions, both for investments as well as hiring new personnel.

According to Déntice, “Over the short term, executives of small companies will be focused on preserving their working capacity that does not depend on bank capital, which is expensive and scarce. They will take a very serious look at who is who among their clients, in order to strengthen their relationships with them, and not to look at the relationship between credit and collections. Inventories will play an important role in the financial structure. And relationships with suppliers must be approached in both directions – because I depend so much on things going right for my suppliers – with regard to the chain of payments. Meanwhile, promotions will be viewed as the tool that companies will have to use in order to keep their products in the market.”

Colina focuses on “emphasizing cost reductions; making Human Resources more efficient; administrative and tax expenses; and production costs. And, after achieving those goals, looking for new products and services, and new channels and routes to communicate and promote them. However, ideas that are new and good don’t help much if there is a sudden loss in profitability resulting from the crisis, and it leads to a rapid decline in the sustainability of the company.”

INTERNAL COST CONTROLS

Researchers emphasize internal cost controls because they will be affected by rising prices for public services such as electricity, transportation and gas. Trade unions, attentive to this situation, are already planning to make new demands on behalf of their members. In this sense, Déntice explains, “Rate increases will have a very strong impact on total costs because the source of energy (electricity and gas) has a lot of impact on companies where energy use is intensive.” That reduces the operational possibilities to just a rarified number of companies, notes Claudio Cabilla, who owns a small company that provides inputs for the petroleum industry that are used in Argentina, elsewhere in Latin America and Africa. “In that regard, I believe that the decisions made by small companies in the salary struggles will include a component that could help worker-owner relationships wind up becoming more flexible, so long as this does not imply an adverse impact on costs.”

This much is certain: The government “does not think about how to work together with the private sector to overcome the crisis; it only worries about its own need to collect enough money to cover its expenses, and that increases the pressure on companies. The same thing is true with trade unions, who insist that the solution to overcoming the crisis should come only from the [management of the] companies, so that unions alone should focus on avoiding layoffs and on promoting very high salary increases, in the double digits,” says Colina.

MOMENTS OF OPPORTUNITY

Crises often lead to opportunities. In that regard, small companies are often the best companies to adapt to changes and problems. One reason is their size. Colina notes, “The history of previous crises in Argentina demonstrates that small companies are the ones who more rapidly resort to informal mechanisms, and to layoffs when the economy moves into a recession. That’s because they are less visible, and because there are so many of them, they are hard to control. In a crisis, size winds up playing in favor of survival capacity.”

In addition, Déntice says, “Small companies are flexible and adaptable, and more fundamentally have an intangible quality, which involves human teamwork and oral traditions, [lessons] which generations inherit about how to deal with a crisis and how to reinvent themselves again and again. This is something very hard to do in big companies because their decisions are tied to headquarters, which deals with its own problems and rationalizes [those decisions] by using other criteria.”

Researchers agree that small companies like IBL have a greater capacity to respond. “So in times like these, they must take advantage of the existence of available human resources to become more professional, and to deal with those customers that global companies have left behind,” stresses Kugler.

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

 

 

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