November 22, 2010 5:32 pm

South American neighbours living worlds apart

 
Octavio Frias de Oliveira bridge in São Paulo

Road to riches: the Octavio Frias de Oliveira bridge in São Paulo. But not all parts of the region have good infrastructure, forcing companies to produce goods locally

Harry Schmelzer knew doing business in Mexico would not be easy. The language, culture and tradition were all different from his home in the south of Brazil. But it was meal times that floored the president of the WEG group, the electrical equipment multinational – sometimes literally.

“When I got to Mexico for the first time and saw that you ate pork ribs and tacos and refried beans for breakfast, I was a bit scared,” Mr Schmelzer says, only half joking. “Lunch in Brazil is at midday and then you go back to work in the afternoon. You have maybe a glass of wine, but you watch your intake. In Mexico, you go to lunch at three and the day’s over. It’s tequila and then you’re out of it.”

Getting to grips with cultural variations can be the difference between failure and success when doing business in Latin America. But it is a challenge that more and more Brazilian companies are accepting. After a wave of investment into Brazil, the tide has turned and the country’s firms are expanding across the continent.

“Right now it is more about Brazilian companies investing abroad than the other way around, and that wasn’t the case four years ago,” says Sandra Rios, director of the Integration and Development Study Centre, a Rio de Janeiro-based group that researches Latin-Brazil business ties. “We had strong investments from Mexico, Argentina and Chile, but now the situation is reversed.”

The percentage of direct investment from Brazil has increased substantially in other Latin American nations, according to Cindes, a Brazilian research group. Since 1996, it has increased 12 times in Chile, four times in Peru and seven times in Colombia, and has reached the point in Ecuador where more than one-quarter of foreign direct investment originates in Brazilian reais.

Latin America’s “southern cone” – Argentina, Chile, Paraguay and Uruguay – takes the bulk of Brazilian investment, with a third going to Argentina and a quarter to Chile. Half of it is destined for acquiring foreign partners, with the main sectors still being minerals and oil and gas.

Overall, 30 per cent of Brazil’s investment in the region is in the extractive sector, far ahead of construction, chemicals, real estate, transport and storage, commerce and agriculture, all of which tied for second place at 8 per cent each. But that is showing signs of change, according to Ms Rios.

“Brazilian companies traditionally invested in Latin America for reasons related to natural resources,” she says. “Vale, Petrobras and Gerdau are good examples and they continue to invest. But the new phenomenon is mid-sized industrial companies that are investing abroad, too. There is definitely a trend towards diversification both in terms of the sector and the size of the companies doing business.”

Ms Rios says the main reason for the change is that many companies with the vision and the resources to invest abroad have already done so. Now, smaller companies are seeing the benefits.

They have easier access to credit – and a helping hand from Brazil’s national development bank; better cash flow thanks to the country’s booming domestic market; and a need to expand lest they become a target for takeovers.

Eurofarma is one such company. The São Paulo drugs group has splashed out more than $50m to snap up family-run companies in Argentina and Uruguay during the past 18 months. The moves give Eurofarma a presence in those countries, plus Paraguay and Bolivia, and will be followed by further acquisitions, says Wesley Pontes, its director of imports and exports.

“We make generic drugs, and 65 per cent of our income is from that,” Mr Pontes says. “So we are solid and we have money in the bank. We realised we had the chance to make good purchases. There are a lot of medium-sized family-run companies that are having problems with the passing of generations and are available to be bought, and our strategy is to identify them and approach them.”

Further west, in Chile and Peru, Brazilian companies are looking at acquisitions for different reasons. Roads and infrastructure leading towards the Pacific are notoriously bad, and getting goods to those markets is so expensive that Brazilian businesses struggle to compete with Asian rivals.

“Transport and logistics costs are very high, even higher than import taxes,” says Ms Rios. “It is sometimes cheaper to export from east Asia to Chile than from Brazil, so companies that have relevant markets in South America are forced to produce in those countries.”

Few ambitious companies worry about security, corruption or instability in their target nations. Most are used to violent crime at home and corruption is seen as an inevitable, if disagreeable, cost of doing business throughout the region.

Other than Venezuela, where the mercurial president, Hugo Chávez, has nationalised a whole slew of companies, and to a lesser extent Bolivia, Latin American governments are pro-business.

“Taxation is difficult, the language is a barrier, the time it takes to establish a company and bureaucracy are slightly negative issues, but enough companies have managed to get round those issues,” says Sir Peter Heap, a former British ambassador to Brazil who now works as a consultant for firms wishing to invest in the country. “Brazil is growing so quickly. It is not a static situation; there is pretty swift growth.”

The cross-continental trade has shifted, but it is not all one way. Brazil’s booming domestic market means opportunities abound for audacious outsiders. The country’s middle class has grown exponentially during the past decade and the economy is expected to grow by at least 7 per cent this year.

Paz, a Chilean housebuilder, was a leader in its domestic market and opened a Peruvian arm with local partners in 2008, says Francisco Ulloa, its international director of joint investments. This year it made moves into Brazil. Such moves are not easy, Mr Ulloa says, because Brazil is much larger and so much more dynamic than its neighbours. Doing business in Portuguese requires not just new language skills, but also significant amounts of cash, preparation and patience.

“Other Latin American companies have been a bit cautious about investing in Brazil because of its size,” he says. “You need two or three or four times the capital than that which you need to invest in other Latin American countries.”

Paz spent years investigating the Brazilian market before it invested, Mr Ulloa says, and he hopes that patience will pay off. But whatever happens, the move – and others like it – marks a sea change in Latin American investment practices, he says. The difference now is that Latin American companies are realising there is money to be made closer to home and they are making moves on their own, without appealing to foreigners.

“For the first time ever we are not looking for capital outside,” Mr Ulloa says. “Investments are being carried out with Latin American capital inside Latin America.”

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