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The Next China


Business leaders with deep experience in Latin America discuss how to overcome infrastructure and security pitfalls to seize opportunities in countries whose collective GDP is on par with China’s.


T

hroughout Latin America, a growing middle class is fueling a demand for cell phones, electronics and other modern amenities. The region’s rich land is a major supplier of food, oil and minerals to markets around the world, including China, Europe and the United States. Yet infrastructure, drug problems, disorganized political systems and resistance to democracy continue to present at least perceived challenges to those who seek to do business in Latin America.

FTI Journal recently convened a panel of business leaders with deep knowledge of Latin America to discuss the region’s untapped opportunities, its future in the world marketplace and the challenges that business leaders must overcome there.

The moderator was Mark Malloch-Brown, Chairman of Europe, Middle East and Africa for FTI Consulting. Panelists included Conor McEnroy, Chairman of Sudameris Bank and founder of the Abbyfield Group; Ron Denom, President of SNC-Lavalin International, Canada’s largest engineering and construction company and an investor in infrastructure concessions around the world; Frank Holder, Chairman of Latin America for FTI Consulting; and Juan Pablo del Valle Perochena, Chairman of the Board of Mexichem, the world leader in fluorspar production and the Latin American leader in plastic pipes and fittings.

Latin America’s Untapped Opportunities

Mark Malloch-Brown: From your business perspective, just what are both the trade and investment opportunities in Latin America?

Conor McEnroy: South America is going through a renaissance. It’s a low-cost producer for hard commodities: metals, oil and gas. And its role as a supplier of food to the rest of the world is underpinning very substantial growth. Brazil in the past 10 years has gone from being an importer of almost everything — chicken, meat, eggs, flour and spaghetti, for instance — to being an exporter of all of those things. Practically every chicken in Europe now comes from Brazil.

Ron Denom: Infrastructure is an important part of agribusiness. Getting the product to port and to market requires warehousing, cold chain roads and ports, and that is just one sector in Latin America.

The region is relatively short on good infrastructure, and there is a need for an enormous build-out program. But immature financial markets hold it back. The mechanisms, the legal and regulatory frameworks, and the contracting structures are not yet in place.

Malloch-Brown: There is a huge process of urbanization going on across Latin America, with still quite a lot of population growth. With incomes rising, people want better homes and better infrastructure.

Denom: I think governments are coming to recognize the need for public/private partnership models. And once this realization takes place, there will be an effort to adopt those practices.

The real underpinning of the renaissance in Latin America is based on hard and soft commodities.

Malloch-Brown: Chemicals are also a sector that expands when there’s economic growth, right?

Juan Pablo Del Valle Perochena: Absolutely. Latin America, in terms of gross national product, is similar to China. And 200 cities in Latin America account for 260 million people. That accounts for a GDP of $3.6 trillion, which is India and Poland combined. Consider that within 10 years we’ll have 350 million people living in those 200 cities, making an additional $3.8 trillion of GDP. That’s almost four times the GDP of Spain. So if that growth doesn’t excite businessmen and entrepreneurs, what does?

Frank Holder: I think the real underpinning of the renaissance in Latin America is based on hard and soft commodities, such as soy in Argentina and mineral and agricultural wealth in Brazil. The opportunity, however, is much broader than that. You’ll find that there are many new people being added to the middle classes, so consumer products are extremely interesting in the region.

The roadblocks to increased trade

Malloch-Brown: Let’s talk about the constraints or challenges to growth.

McEnroy: As a banker, I would argue that South America has the elements it needs to put together an organized society: cash, people, water, land and energy. What it lacks is know-how and access to market, the essential elements that it needs to develop its own products and export them.

How do we increase trade between the United States and South America? The answer is in financing and in bilateral help in terms of technology transfer. Help the government get organized. Help it develop a digital land registry. Help it digitize its identification process for its citizens.

There are many opportunities for countries like the United States to do a lot of trade with South America over the short and long terms. In Paraguay, where we are heavily invested, we have huge amounts of land that need to be plowed and planted. Every tractor there now is a John Deere; every

We have a success story in Mexico, but not every country in Latin America is ready to sign on to a free trade agreement.

spraying machine is a Valley — both U.S. brands. And customers will increase if there is financing from banks. But our farmers can’t afford to pay for a tractor in six months. They need three years.

Denom: Another facet of technology transfer is the transfer of know-how. Certainly in the engineering business, we can see a clear gap between the workforce available across South America and what we need to successfully carry out the business. Countries like Brazil have benefited from a strong currency, but wages and costs are rising and productivity’s not going up. They have huge potential here, but you really have to get through this productivity bottleneck.

Malloch-Brown: What are the other really constraining issues?

Holder: Long-term capital usually requires a macroeconomic environment that is relatively predictable and stable. Latin America has had long periods of hyperinflation, fiscal irresponsibility and political instability. From the time most Latin American countries bid on a piece of public infrastructure work to the time it’s actually built is about nine years. It is extremely difficult to envision any sort of long-term planning in that kind of environment.

Other challenges are weak institutions, a weak regulatory environment, corruption, and the difficulty and time it takes to resolve a dispute. Investors require a fair playing ground, and there we have a lot of work to do.

The biggest challenge to the region actually is infrastructure. A number of economies are right up to the ceiling of what they can do with the infrastructure they have — the electrical grid, production of petroleum and gas, seaports, roadways, trains.

Denom: Free trade and globalization are all about the free passage of goods, services and people across national borders. We have a success story in Mexico, but looking across the rest of Latin America, not every country is ready to sign on to a free trade agreement. In many cases, it’s quite the opposite, and there’s a kind of nationalism.

McEnroy: Economists have pointed to a referendum on democracy in Latin America. There were 12 elections in the same year across the region. Certain countries have opted out: Venezuela, Ecuador, Nicaragua, Bolivia and Argentina. They are going for their own 21st-century socialism model.

The rise of a middle class

Malloch-Brown: Paraguay is still a rural country where people are earning a living off the land, but are you seeing a democratic middle class emerging that is fighting for its political rights and demanding a say in the country’s direction?

McEnroy: If you look at Paraguay’s population curve, you’ll see that half the citizens are under age 20 and two-thirds are under 30. And 85% of them have a mobile phone. And the reality is that when you give young kids mobile phones, when they have Skype so they can talk for free with their cousins in New York or Madrid, the world begins to change. And they see consumer advertising and want the same things everybody else wants. They are incredibly hungry for education, unwilling to live like their parents did, and now getting enfranchised with the vote. I think that this is an unstoppable force.

Denom: This young population is rejecting existing political structures, political hierarchies, even hierarchies in business, and changing to much flatter, much more participatory structures.

Malloch-Brown: Are we going to see a Latin American Spring? Will governments be threatened by this kind of youth movement?

Holder: If one wants to understand how Hugo Chávez keeps getting re-elected in Venezuela, one really has to look back at the way an entire class of the population had been treated by all the prior presidents. The Chávez phenomenon has a lot more to do with social inclusion and with wealth for the most impoverished portion of society than anything else. It’s a lot less attributable to “We don’t care about democracy” and a lot more attributable to “We would like food to eat and cell phones to use.”

Weak institutions and corruption and cronyism and everything that comes with them are a threat to the region. We need to strengthen those institutions so that you don’t have personality-driven governments over and over again. And I also believe that the incredibly high concentration of wealth in the very top of society is a big threat.

Malloch-Brown: It can be said that the political problem of the region is that the Gini coefficient — the way economists measure inequality — is the most extreme of any in the world.

McEnroy: Nobody questions that inequality is severe, but I question the embedded conclusion: Let’s tear down the people who have accumulated wealth and redistribute it.

Holder: There’s a broad consensus that the strategies that have tried to redirect wealth have failed. What has worked is where the state has tried to make the rules or the playing field more level and to create an appropriate safety net for the most needy in the society. It’s really about making it possible for others to move up within the classes.

The problems of drugs, crime and violence

Malloch-Brown: As the United States looks south, it doesn’t see the kinds of issues we’ve been talking about: economic development and opportunity, and remaining problems of inequality. What the United States sees is drugs, crime and violence.

Del Valle Perochena: It’s funny that you say what the United States sees. The problem starts in the United States with the demand for drugs. If no people in the United States are smoking marijuana or using cocaine, you won’t see problems with crime, guns and dead people in Mexico and elsewhere in Latin America. So it is a big problem. It is sad to see that the United States generally thinks of those problems as widespread in Mexico.

They don’t want to go to Mexico on vacation or business because of what they see happening in Ciudad Juárez. But what happens in Ciudad Juárez is totally different from what you see in the Riviera Maya or Puerto Vallarta or Ixtapa. So the perception is very different from reality.

Malloch-Brown: Do you see the violence and drug-related problems getting better or worse?

The cost of security guards in Brazil is something on the order of $8 billion a year. It is a tremendous drain on the economy.

McEnroy: Well, I actually see them shifting around. As one state cracks down, the drug dealers just pick up shop and set up next door.

There are some misconceptions about Mexico. Recently a Geneva declaration on armed violence and development counted violent deaths around the world. In the past year there were 526,000 violent deaths, with 25% of those deaths in 14 countries. Six of the countries are in Latin America: El Salvador, Honduras, Colombia, Venezuela, Guatemala and Belize, but not Mexico.

We see the drug problem another way. When I travel in South America, I see security guards everywhere. The cost of the security guards in Brazil is horrendous. It’s something on the order of $8 billion a year, equivalent to what the United States spent on companies like Blackwater the first four years it was in Iraq. It is a tremendous drain on the economy. On top of it, public transport is not safe, so everybody sits in cars in massive traffic jams. That’s another penalty on productivity. Then there is the whole issue of money laundering. It has to be brought under better control.

I don’t believe the real issue starts with the demand. It starts with the supply. The farmer who is growing the coca leaf — does he want to be in the narcotics business? If the global trading companies could give him a little bit better price for his carrots or his wheat or his sunflowers, he wouldn’t grow that stuff. A farmer with 20 hectares doesn’t plant 20 hectares of marijuana or cocaine; he plants half a hectare as an insurance policy against the rest of the crop failing or not getting a decent price.

Holder: I believe we have a problem with public insecurity in Latin America because the institutions of government do not function properly. Crime does pay in Latin America. You can commit a crime 98 times and maybe on the 99th time you’ll get caught. The judiciary is so slow, and it suffers from corruption and under-resourcing and lack of technology. And the police have the same problems.

Every year, FTI Consulting produces a public insecurity index on the region, which tracks trends in countries and cities. The good news is that in the past three years, we’ve had countries and cities that have been improving for the first time in a decade. The improvement actually started in Colombia, which is

Whether your view on the world is political, economic or social, a big challenge is to make the small boats rise in South America.

profoundly different from what it was just a short while ago.

Unfortunately, it’s like squeezing the balloon. Where did that problem go? Well, it left Colombia and went to Central America.

So in the end, there’s a more productive and efficient way to resolve this problem. It has to come in some ways from the government getting better at doing its job of policing and justice, and in some ways from the private sector collaborating in an intelligent manner with the public sector in getting it done.

The changing dynamics of trade with Asia

Malloch-Brown: As Latin America diversifies its exports and moves upmarket, will it find as ready a market for those exports in China, or will we start to see exports shifting back more toward the United States and Europe? Will south/south trade be the major avenue of export growth?

Del Valle Perochena: As commodities specialize and become more valuable products, countries like Brazil and Argentina will find new markets. There is a clear opportunity there, even though the United States is a mature market that won’t grow in a significant way in the next five or six years. So I would say that they will find significant opportunity in the United States or in Europe, but China will still play the stellar role because that market will also develop.

Holder: Interestingly enough, in the latest five-year plan published in China, they are looking at moving away from the heavy, energy-intensive polluting industries. They say they have paid a tremendous environmental price supporting these industries, which are basically to make products to export principally to the United States. China wants to move upmarket into value-added, knowledge-intensive products.

These heavy industries will be moving out into China’s neighbors in South Asia. So I think for commodity exports from South America, we will see a gradual shift away from China and more into the surrounding region.

If you look at exports as a percentage of total GDP, they’re very small in most countries in the region — less than 10% of GDP — with the exception of Mexico. So the real challenge is in imports. A lot of finished products need to be brought in, and this creates a trade imbalance. Latin America needs more infrastructure to be able to export more. China in that sense has been a wonderful boon for the region, which once basically exported mostly to the United States and Europe.

China is now a top foreign investor in most of the region’s markets, and it’s also one of the top five trading partners of almost every country in the region, including Mexico.

But intraregional trading is also interesting. Argentina’s biggest trading partner is not China, and it’s not the United States; it’s Brazil. So Brazil is doing a lot to try to integrate itself with the countries around it because it realizes it’s a lot easier to do that than to ship stuff 8,000 miles.

So you’ve got two interesting phenomena going on. One is the growth of intraregional trade. The other is a sort of diversified growth of trade to the three principal markets in the world, which are China and its neighbors, the European Community and the United States.

McEnroy: Whether your view on the world is political, economic or social, a big challenge is to make the small boats rise in South America. I do see pockets of activity where countries are hauling people out of the various classifications of poverty to what we generically call the middle class in the States. For example, in Lima, over time people are moving out of the favelas into well-organized, planned urban communities and little townships and municipalities within the broader Lima, and this has had a tremendous effect. The average discretionary spend every time somebody moves into an apartment
in Lima is $2,000. I see a nascent but growing domestic consumption, and I think we know that South Americans, if they have the money, will buy the brand.

Malloch-Brown: Thank you all for a very good discussion. It’s clear that some of the perceived challenges to doing business in Latin America are real and some less so. But underlying everything you have said is that the potential is enormous. And that’s something that should be of interest to many potential trading partners in other parts of the world.

Published April 2012

© Copyright 2012. The views expressed herein are those of the authors and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.

About The Authors


Mark Malloch-Brown
mark.malloch-brown@fticonsulting.com
Chairman of Europe, Middle East and Africa
FTI Consulting

Frank L. Holder
frank.holder@fticonsulting.com
Chairman, Latin American Region
FTI Consulting

Juan Pablo del Valle Perochena
Chairman of the Board of Mexichem

Ron Denom
President of SNC-Lavalin International

Conor McEnroy
Chairman of Sudameris Bank and founder of the Abbyfield Group

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