Multinationals boast many competitive advantages from scale to talent to cheap cost of capital. So why are they so shy about leveraging their financing strength in emerging markets like Latin America? They would be smart to review the playbook of multilatinas, starting with Carlos Slim’s empire.
Even with the U.S. corporate sector swimming in cash today, U.S. CFOs are loath to extend credit to customers in emerging markets, and, even less logically, make money off their cash starved suppliers in emerging markets. U.S. companies not only borrow money at lower rates than their similarly sized Latin American counterparts, U.S. companies can rotate their capital 8-12 times per year more than Latin American corporates. All but the largest Latin American firms are chronically short of capital.
A decade ago, when my firm was a supplier to one of Carlos Slim’s (more than 200) companies in Latin America, I learned that the payment of our invoices came with several choices. If we wanted to be paid in local currency (Mexican pesos), then the terms were net-90 but we could be paid sooner, even within one week, if we were willing to stomach 2% per month discounting. If we chose to be paid in U.S. dollars (as most foreign suppliers prefer), then payment terms were also net-90 but with a 4% discount from the start. Earlier than 90-day payment in dollars meant adding another 4% discount per month.
Carlos Slim understands the power of capital on both sides of the accounting ledger. Back in the late 1990s, before cellular sales took off, Telmex devised a clever ploy to leverage its functional monopoly in local telephony. At the time, Telmex had 14 million landline customers, who paid close to $400 to purchase and install their line. Failure to pay your bill within 60 days led to line cancellation and the time and expense (another $400) to reinstall your line, possibly with a new number. Telmex had their customers on a short leash.
The late 1990s saw the initial explosion of internet connectivity and home computer use in Mexico.
The annual market for computers was roughly 1 million units per year in a country of 100 million inhabitants. To buy a computer and ISP service required either a lot of cash or a credit card, which less than 10% of Mexican households could claim. Telmex teamed up with Acer computers and Prodigy ISP and sold its landline customers a turn-key olution to home computing and internet connection. Customers were asked to pay roughly $60 per month for five years or $3,600 to purchase a computer worth no more than $800 and an internet service that cost Telmex a few dollars per month. The bundle seemed overpriced to anyone with a credit card but for most Telmex customers, it was the only realistic way to obtain a computer with ISP connectivity. The market gobbled up the concept and Mexicans were soon buying 2 million computers per year. Carlos Slim commanded 50% market share as the largest reseller of computers in Mexico, without taking one sale away from the competition – he used credit to create a market that never previously existed.
In Latin America today, premium B2B brands from Europe, the United States and Japan in categories like construction equipment, mining equipment, manufacturing equipment, etc. struggle to compete with new Chinese brands which may be 50% less expensive. However, if a premium brand, which Latin American buyers would prefer to purchase, can be paid for via credit over a two-year period, then such a purchase is easier on their cash flow than paying for the Chinese brand up front. Few Chinese competitors have the same access to credit and working capital as legacy, premium-priced competitors.
The more nimble, premium brands that have discovered the market-opening power of extending credit soon discover that they make more money charging interest on a 12-month line of credit (1-2% per month) than they make in product margins.
It pays to think like a multilatina when trying to conquer emerging markets.
JOHN PRICE is the managing director of Americas Market Intelligence and
a 24-year veteran of Latin American competitive intelligence and strategy
consulting. [email protected]
This article was published in Top500 2018 edition of Latin Trade