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Chile and Peru Cement Business Ties

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Growing business ties between Chile and Peru should help weaken the traditional border disputes, experts say.

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For years, political ties between Chile and Peru have moved along a windy path marked by border disputes and bitterness, much of which dates from as far back as the armed conflict of the War of the Pacific in the late 1900s. However, business between the two countries seems to be taking a more positive turn. Last August, more proof of an economic rapprochement between the two countries came when Brescia Group, a Peruvian conglomerate with $3.2 billion in annual turnover, announced its acquisition of 80 percent of Lafarge Chile, the largest cement company in Chile.

“For many years, we have been looking for opportunities in Chile,” Mario Brescia, president of the company, told the Chilean newspaper El Mercurio. As he explained, the company’s expansion plans also include another cement acquisition, developing a gold deposit, constructing petrochemical plants and launching fishing industry projects -- almost all of which would be done in partnership with Chilean enterprises.

It’s a positive move for corporate Peru, some experts say. “In principle, the biggest business deal between Chile and Peru exposes Peruvian companies to the most advanced business practices and production methods," notes Juan Garrido, professor of economics and international business at the Peruvian University of Applied Sciences (UPC). "Chilean companies have enjoyed a greater period of macroeconomic stability, and have been able to improve their business practices to a level that Peruvian companies have not been able to reach. This translates into an opportunity for Peruvian companies in an environment that is more competitive.”

What's more, says Gonzalo Jiménez, professor of business at Adolfo Ibañez University in Chile, “the new thing about the Brescia deal is that it breaks the recent trend in the commercial dynamics between the two countries, where most of the investments have materialized from Chile into Peru.”

Jorge Torres, professor of business at the Pontifical Catholic University of Peru, agrees. "Until recently, business between Chile and Peru could be summed up by the arrival of Chilean capital in the Peruvian market,” he notes. One of the most "emblematic examples" was the 2007 acquisition of Wong, the Peruvian supermarket chain, by Chile’s Cencosud, in a deal valued at $500 million. “Only now, with the Brescia case, are Peruvian investments in Chile resuming.”

THE BURDEN OF HISTORY

“The more commercial ties there are between Peru and Chile, the more the countries' interests will be aligned,” Torres says. “That will make it possible to resolve historic problems which, until now, have limited [these countries’] ability to take advantage of opportunities for cooperation, even in areas that are not economic.”

Indeed, the historical wounds run deep. In the War of the Pacific, Chile fought against both Peru and Bolivia, and as a result of its victory, the Peruvian provinces of Tacna, Arica and Tarapacá – rich in saltpeter and copper – became Chilean territory.

Leonardo Liberman, professor of business at the Adolfo Ibañez University, is among those experts who views Brescia's cement deal as a sign of regional economic integration. “The arrival of the Peruvian conglomerate in Chile is a sign that Latin America is getting ready to enter an unprecedented phase of economic and commercial integration, accompanied by foreign direct investments in the region," he says. "Almost all the information we have from the market indicates that this integration process will begin during the next decade. Forecasts call for these investments to start in 2010 [and they will be] characterized by a clear expansion in the continent of Latin American companies through acquisitions, mergers, alliances and joint ventures.”

In the near term, José Noguera, professor of economics at USACH, the University of Santiago de Chile, predicts that Brescia’s acquisition will have a positive impact on the cement industry in both Chile and Peru. He anticipates "a greater degree of vertical integration between the two countries, especially in the cement market and in sectors using cement as an input…. Services such as consulting, accounting, advertising and marketing will also benefit, especially in Peru.”

Not everyone is as upbeat, however. Beatrice Avolio, professor at the business school of the Catholic Pontifical University of Peru, notes that Brescia’s deal is “an exception to the rule. In the short term, I do not foresee Peruvian businessmen acquiring new and significant ownership of [highly profitable] Chilean businesses with greater margins than they could get in Peru. In other words, if Chilean companies are growing in Peru, why would Peruvian businessmen take a chance on a market that is already mature, like the Chilean one?” As for Chile's interest in Peru, Avolio contends this is out of necessity, "due largely to the fact that the Peruvian market today has a greater growth potential for the Chileans.”

OLD NEIGHBORS, NEW MARKETS

Granted, business between Peru and Chile is not a new phenomenon. In fact, it has been growing for more than a decade. Among the more promising sectors for cross-border business is retailing, but it has largely resulted in investments flowing from Chile into Peru. “For a long time, Chile has been exporting its retailing model to Peru, which transfers its experience in mining," says Jiménez. "You can see quite a few Chilean retailers operating in Peru [in the home improvement and construction sectors], such as Falabella y Ripley, the Ahumada pharmacies, Casa & Ideas, Homecenter Sodimac, and Easy.”

In contrast, there is considerably less Peruvian investment in Chile. Yet Jiménez notes that major Peruvian investors in Chile include families such as the Romeros, who have invested in Chilean banks, and the Wieses, who have significant holdings in Chilean retailing. Meanwhile, Peruvian celebrity chefs-turned-entrepreneurs, Gaston Acurio and Emilio Pescheira, also have a foothold in Chile.

Yet despite several years of strong business relations between Peru and Chile, notes Garrido, “there have been some very regrettable episodes in the commercial relationship between the two countries.” A case in point: Aero Continente, a Peruvian airline that operated in Chile between 1999 and 2001, which had been accused of laundering drug trafficking money in Peru, Chile and the United States. Another case involved Chilean food company Luchetti. In 2005, Luchetti was accused of soliciting favors from Peruvian officials in order to build a plant in an environmentally protected part of the country.

Yet it is not only the risk of repeating mistakes of the past that can scupper a major wave of cross-border investing. Jiménez warns that political barriers could also hamper the greater commercial integration of the two countries. “The only fear that Chilean business people still have [about Peru] is of a political nature," he says. "Although with President Alan Garcia at the helm, Peru is moving toward stability and economic growth, there is a small amount of fear that, under a future administration, Peru could become more populist and move closer to the orbit of Venezuela's president, Hugo Chávez, which would stifle opportunities for Chilean businesspeople. In any case, according to Peruvian opinion polls, there is an extremely low probability that this will happen.”

Noguera says the political arena can indeed stand in the way of the development of trade between the two countries. “Diplomatic relations between Peru and Chile have been a little more strained in recent weeks," he says. Yet "I don’t anticipate any significant consequences in the economic arena…. Investors are used to being concerned each time events reflect political instability. I believe that the results of Chile’s next presidential elections – this December – could have a bearing on this trend.”

Beyond politics, Garrido suggests that profound obstacles in the collective Peruvian subconscious make it hard to benefit fully from the opportunities for developing economic ties with Peru’s neighbor to the south. “There are reactions of a chauvinist nature about the arrival of Chilean capital in strategic Peruvian sectors, such as ports and airports. This makes it hard to take advantage of the total business potential of both countries. This chauvinism comes partly from certain political groups, which want to exploit the wounds of [the War of the Pacific].

Liberman adds that culture also presents a challenge for Peruvian companies wanting to operate in Chile. “There are certain cultural differences, such as in the way time is perceived. Chilean culture is stricter, and has a greater sense of urgency than Peruvian culture," he says.

Despite the formidable political, administrative and cultural challenges, Liberman notes that this year's new free trade agreement between Peru and Chile, which replaces the Economic Complementarity Agreement of 1998, “provides legal backing for investments that come from both countries, and brings mechanisms for the speedy solution of disputes associated with investments and trade. This commercial framework will promote bilateral exchange, strengthen the reciprocal flow of capital, and [pave the way for] foreign direct investments that have major benefits for business executives in Peru and Chile.”

UPS AND DOWNS

Without a doubt, Brescia's cement deal should provide a big boost to its growth plans at home and abroad, and not just in cement. According to Torres, among other investments, Brescia plans to construct a large hotel in the financial and commercial heart of Lima.“The Brescia conglomerate owns 40 different firms that operate in various sectors of Peruvian industry, strengthening its position as the largest business entity in Peru,” he says. And its successes “are generally more significant than its rare mistakes."

Those mistakes, as Avolio recalls, include some made in the 1980s when Scala – Brescia’s department store division – did not do as well as the company had planned, and the failures of its Mercantil de Lima division, which distributed consumer goods, and its Textil Union division “were widely known.”

Liberman believes the Brescia-Lafarge deal is only just the beginning of greater economic integration in the region, citing recent agreements for stronger integration of the stock markets of Chile, Peru and Colombia. "That will increase the flow of capital between these nations and cross-border foreign direct investment," he says.

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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