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Latin America 2012: Japan’s Perspective

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Increased labor costs, especially in Brazil, is the key challenge for Japanese companies in Latin America. 

BY LBC STAFF 

More than half of Japanese companies operating in Latin America are optimistic about the region this year. 

According to a survey by the Japan External Trade Organization (Jetro), 55.7 percent of respondents said they expected operating profits to “improve” in 2012. Another 38.4 percent of companies expected their profits to be “unchanged,” while only 5.9 percent companies expect to see profits “deteriorate.”

The Japanese companies that participated in the survey operate in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela – the top seven economies in Latin America.

Meanwhile, the 2012 diffusion index, which is used to measure business confidence by taking the proportion of businesses reporting increased operating profits minus those reporting decreased operating profits, increased to a positive 49.8 from 43.9 in 2011.

Peru and Brazil were the stars in the survey. Peru received the highest response of “improved” profits (71.4 percent), followed by Brazil (64.2 percent). Similarly, the diffusion index for Peru stood at 71.4 and fo Brazil 59.3. The other Latin American countries also had positive diffusion indices, albeit at smaller levels.

“In spite of the slightly decelerated Brazilian economy, given its population of nearing 200 million, the growth is expected to continue,” Jetro says. “So they see a lot of business probability led by domestic demand.”

Japanese direct investment has grown more than fourfold in Brazil between 2005 and 2010 – from $953 million to $4.3 billion, Jetro points out.

CHALLENGES

Increased labor costs is the key challenge most Japanese companies expect to face in Latin America this year. Some 58.9 percent of respondents cited this as the most prevalent administrative issue. That compares with 49.5 percent for 2011.

The second key challenge is “fluctuation in exchange rates,” which decreased slightly from last year’s 56.8 percent to 51.6 percent and moved from the first to second most common issue.

Following these were “taxation system problems” at 38.0 percent and “increase in materials cost” at 32.2 percent.  

By country, Brazil had the highest response rate for “increase in labor costs” with 86.6 percent, followed by Argentina with 79.2 percent.

“Labor markets in both countries face constant pressure to raise wages due to their prosperity,” Jetro says.

In the case of Argentina, the country’s salaries are also being pressured upwards by a 25 percent annual inflation – the highest in Latin America and one of the highest in the world, according to Latin Business Chronicle data.

"Comparing Brazil and Mexico, the other giant in Latin America, Brazilian-Japanese companies face issues in dealing with labor management and a complicated tax system more than those in Mexico,” Jetro says.

Brazil has Latin America’s worst tax environment, according to the Latin Tax Index from Latin Business Chronicle.

Chile was the highest for “fluctuation in exchange rates” at 68.8 percent, followed by Brazil at 53.7 percent and Mexico at 52.4 percent.

JAPANESE INVESTMENTS

Japan last year became the largest foreign buyer of Latin America assets, according to the ranking of the region’s Top 100 Mergers & Acquisitions from Latin Business Chronicle.

Kirin, Japan’s second-largest brewer. last year paid $2.5 billion to acquire of a majority stake in Brazilian brewer Aleadri-Schinni and $1.4 billion to buy outstanding shares in investment holding company Jadangil Participações.

Meanwhile, a group of Japanese and Korean investors paid $1.95 billion for a 15 percent stake  in Brazil’s CBMM, the world's largest niobium producer.

2011 figures for overall Japanese investments in Latin America are not yet available. In 2010, they reached $5.3 billion, a clear slowdown compared to the 2009 level of $17.4 billion and the 2008 level of $29.6 billion, according to data from Jetro. 

© Copyright Latin Business Chronicle

 

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