Why a long-term commitment to Latin America, despite its volatility and inevitable down cycles, is a winning strategy.
BY GERMAN HERRERA
Winning in Latin America demands an appreciation for the region and a long term perspective. The essential question is why you want to do business in the region. A market that’s currently growing faster than most others is naturally attractive. But are you there just for a quick return? Or are you committed to the region long term, despite its volatility and inevitable down cycles? History suggests that the former is a blueprint for losing, the latter, for winning.
The economic news coming out of Latin America these days is, in a word, good. Right now, many are touting the region as the land of opportunity.
“Countries in Latin America managed to resist the global economic and financial crisis more successfully than in many other regions of the world,” says The Organization for Economic Co-operation and Development. “The performance of the region’s economies was surprisingly strong particularly when compared to past crises, and this time their medium-term prospects have emerged largely unscathed.” The IMF forecasts that every economy in Latin America will expand in 2011, and expects the region overall will grow an impressive 4.5 percent. “With money cheap and returns poor in the rich world,” notes The Economist, “Latin America has become a tempting destination for investors.”
Without question, Latin America can be a profitable place to do business. However, the results you realize there will largely depend on the mindset you bring to the region. In this article, we contrast the assumptions and practices we see separating the winners from the losers in Latin America.
SOME LIKE IT HOT
Every five or ten years, Latin America is pegged as a hot growth market and global business investment flows in—especially when other regions are in down cycles. Many multinationals will enter Latin America in a big way while the market is growing. Some will launch greenfield efforts, confident they can quickly recoup their investment in a hot economy. Others pay premiums to acquire local companies. The cost is justified by the superior growth potential in the region, and by the assumption that the multinational’s well-honed processes, systems, controls and scale will quickly dial up the value of the acquired assets.
Most find, however, that it is easier said than done. Latin America is complex, diverse and volatile. Of late, Brazil has been among the fastest growing markets in the world, but it has been haunted by inflation. Colombia, Chile, and Peru have evolved into relatively stable democracies that increasingly favor foreign capital and investment. Argentina and Ecuador have struggled but offer improving business climates. Mexico has endured internal strife and security problems, but seems intent on dealing with them, as did Colombia. Venezuela has careened toward its own vision of 21st century socialism. In sum, the region is complicated, and often unruly.
As such, companies expecting Latin America to miraculously conform to operating assumptions and models crafted for more uniform, stable markets are destined to be unnerved and ultimately discouraged by the realities of the region. This trend is compounded by the widespread tendency to place a high risk premium on the company’s presence in the Latin America. Many companies reason that, in light of the unique challenges that come with doing business in the region, the company should be there only if the returns are significantly higher than those available in more stable regions. Companies that simplistically apply this blanket rationale, making little or no effort to understand or value Latin America in its own right, set themselves up for failure. When growth in their chosen LatAm markets inevitably slows at some point, making premium returns unattainable, or when operating in the region proves problematic, these companies decide they would be better off focusing on more stable markets. They pull up stakes, shuttering their Latin American operations and selling their dearly purchased assets cheaply back into the hands of locals, who will gladly sell high, once again, when companies return to the region looking to capitalize on the next growth cycle. In this way, companies that enter Latin America demanding a higher and quicker return than they can earn in other markets often end up receiving no return at all.
Remarkably, many multinationals re-enter Latin America again and again, repeatedly buying high and then selling low. Each time they re-enter, they are challenged to regain the trust and commitment of the best local customers, employees, suppliers and banks, all of whom will remember that the company pulled out before. As such, the company may pay even more to re-establish essential relationships, and these higher start up costs make their presence in the region even less tenable. With the next economic down cycle, inflationary spike, or other unpleasant surprise, the company once again sees returns fall far below what they expected and, as before, it exits, divesting its assets for a fraction of their investment and/or purchase cost.
SOME USE IT AS A TRAINING GROUND
The complexity and uncertainty of the region—with its multiple currencies, variety of political environments and fickle economies—have long made Latin America a favorite training ground for developing executives, a place where multinationals rotate young leaders to gain experience and make mistakes. These rising executives are aware, of course, that they are being tested and that their time in Latin America will be short. As such, they are motivated to focus almost exclusively on optimizing immediate results with little regard to long term viability. This of course compounds the false impression that no one can sustain business success in Latin America for long.
In summary, the formula for losing in Latin America is:
Think and act short term. Chase returns when markets are hot.
Blindly apply the same risk management and operating models you use in the rest of the world, with no adjustment for local conditions.
Use Latin America as a training ground. Rotate expatriate executives through every 3-4 years.
Assign leadership responsibilities to executives who don’t fully understand the complexity and realities of the region.
SOME GO IN TO WIN
Winning in Latin America begins with understanding and accepting the facts of the region. Yes, in Latin America you are more likely to experience political instability, inflation and currency fluctuations than you are in North America or Western Europe. Success stems from accepting the realities of the region and taking practical, proactive steps to optimize earnings and mitigate risk long term.
Winning strategies we’ve seen work in Latin America include:
Invest for the long term. If you choose to do business in the region, expect some bumps in the road, but know you can generate very competitive returns there over time.
Apply a region-specific risk model. Use a selective portfolio approach specifically geared to the diverse environments that make up Latin America. Assess local conditions in light of your company’s global strategy, cross off those countries that are clearly not a good match, then decide where you will do business, and at what levels. For example, a company we serve has a direct presence in Brazil, where they own facilities and employ full time staff, while in several other countries they operate solely through distributors and joint ventures. A shrewd portfolio strategy spreads your risk. While you are reaping superior gains in Brazil, you can use the profits to underpin your less profitable presence in Venezuela and Peru, so that later, when things get difficult in Brazil, earnings from Venezuela and Peru help you ride out the storm—without having to shut your doors and lose everything.
The portfolio approach is entirely consistent with long-term perspective. You forego the opportunity to reap 20% this year—but with dangerous exposure to a subsequent market crash in one country—to create relative surety that you can earn an aggregate 10 percent or more across the region. Over time, a well constructed Latin American portfolio can earn a return similar to what you might realize in the U.S., and with a comparable level of risk. While your competitors repeatedly incur the cost and delay of having to ramp up their Latin American operations with each up cycle, you are positioned to absorb setbacks within a given country or even a down year overall, knowing you are positioned to rapidly recoup profits when conditions improve. You have accepted smaller but still competitive returns along the way to fund the portfolio and build a stable regional presence.
Make Latin America a destination for great leaders. While your competitors go on cycling through short term expatriates and sending their best Latin American talent out of the region to run global businesses or larger regions, thus creating a brain drain on their LatAm operations, you can keep great leaders in place and provide them clear and strong incentives to meet long-term goals. Challenge them to show you what they can do there through a business cycle lasting 7-10 years.
Put the right competencies in the region. As you commit to Latin America long term, your decisions about which leaders should run your operations there become more critical and require correspondingly more rigor, including objective assessment of your executives and leadership candidates against globally benchmarked leadership competencies. While many competencies are needed, we have found that these four objectively measurable competencies are especially vital to winning in Latin America:
Market knowledge. Latin America can be very hard on leaders who lack insight into its complexity or fail to appreciate its many unique challenges. Make certain your executives command (or can rapidly develop) a clear understanding of the region and what is required to succeed there.
Strategic orientation. To cope with the diversity and volatility of Latin America, your executives must see the big picture and account for many variables beyond their control as they craft and execute long term strategies. The portfolio approach, described above, demands very strong strategic orientation.
Team leadership. Strong team leadership is another competency clearly required to lead a portfolio operation. However you structure your presence in Latin America, effective teams will be a key to navigating the complexity of the region.
Results orientation. Over time, Latin America can yield very competitive returns, but your leaders there must exhibit sustained focus on results and high levels of perseverance in the face of shifting and sometimes adverse conditions.
Objective assessment against these and other important competencies helps you to identify which leaders have what it takes to win in Latin America, and guide leadership development of the executives you choose to run the region.
Latin America is an increasingly attractive market for multinational companies. No doubt, your company can be successful there. But as with any strategy, winning in Latin America requires you to make sound choices, especially: Where you will compete (use a selective portfolio approach to structure your presence in the region)... When you will compete (commit to be in Latin America long term)... How you will compete (with a strategy tailored specifically for the region and for each country in which you decide to operate, executed by executives with the right competencies for the region, who are rewarded for long term results).
German Herrera is the Managing Partner of Egon Zehnder International’s Atlanta and Miami Offices. He joined the firm in 1998 in Bogota, where he spearheaded the Egon Zehnder’s development efforts in Colombia, Venezuela, and Peru. His career includes managing the new business development efforts for Promigas, a diversified telecommunications, energy, and natural gas conglomerate in Colombia, and working as an engagement manager for McKinsey & Company’s Andean Pact Office. He wrote this column for Latin Business Chronicle.
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