In early December 2007, a rumor exploded in London’s business press: Brazilian mining company Vale was preparing an offer to acquire Swiss company Xstrata. A month and a half later, the open secret of the negotiation between these two giants - both companies are in the top ten of global mining operators - was confirmed. While an offer is still in the future, at the time this article went to press Vale had reportedly raised US$50 billion financing for a stock and cash offer whose value could reach US$90 billion.
The news clearly shows the dimension Vale has reached in the global corporate panorama. The company is one of the best examples of the handful of Latin American companies that in recent years have taken their operations to the world stage. The appearance of global companies based in the region is a phenomenon common to all emerging economies, and was described by Boston Consulting Group in 2006 as a world business revolution. And what a revolution it is. In November, when Petrochina listed its shares on the Hong Kong and New York stock markets, the value of the company reached a trillion dollars, displacing Exxon Mobil as the largest company in the world.
INSEAD researchers Lourdes Casanova and Mathew Fraser carried out a study that sought to identify the factors that have been behind the rise of Latin American multinationals, the Global Latinas. Here in TEN, we offer a preview of the study’s findings.
GLOBAL LATINAS
According to Casanova and Fraser, the rise of “multilatinas” - companies from the region that built on their domestic market positions to expand throughout Latin America - is a phenomenon that attracted attention in the 1990s. Now, they say, we are in a new phase in which some companies are following much more aggressive expansion strategies on a global scale.
Clear evidence of this new phase is the evolution of foreign investment flows from Latin America toward the rest of the world. According to ECIAC data cited in the study, this flow reached US$40 billion in 2006, a 114% yearon- year increase and solid proof that Latin American companies are active participants in the internationalization of business.
In this study, Casanova and Fraser define Global Latinas by three basic criteria: ownership, geographical scope and level of sales. The ownership criteria stipulate that the company must be owned and run from within a Latin American country. Global Latinas controlled by foreign conglomerates, such as the Enersis electricity holding that is owned by Spain’s Endesa, are therefore excluded. The study also excludes 100% state-owned businesses. The two largest companies in the region, Venezuelan oil company PDVSA and its Mexican counterpart Pemex, were subsequently excluded from the analysis.
In regards to geographic scope, the companies must have operations beyond Latin America. And as for sales, the study used the limit established by the World Economic Forum of US$500 million a year to define a global growth company. The study was however flexible with this criteria, and included some medium sized companies from sectors that are not normally included in the ranking of Latin American companies.
Latin America foreign investment in the rest of the world grew 114%Casanova and Fraser covered 12 companies: the América Móvil mobile telephony holding controlled by Mexican magnate Carlos Slim; Mexican packaged bread and foods group Bimbo; Mexican company Cemex, one of the three largest cement producers in the world; Brazil’s Vale (until recently known as CVRD), the largest iron ore exporter in the world; Brazilian airplane manufacturer Embraer; Brazil’s state controlled oil company Petrobras; Chile’s principal wine exporter Concha y Toro; Brazilian cosmetics manufacturer Natura; Brazilian IT fi rm Politex; Guatemalan fast food chain Pollo Campero; and Peruvian restaurant chain Astrid y Gastón.
The study seeks to answer three big questions regarding the rise of these Global Latinas..
I- LONG LIVE THE MACRO
What were the factors that facilitated the rise of the Global Latinas? The region’s macroeconomic turbulence in the second half of the 1990s made it time to sink or swim, and Latin American companies had to strengthen themselves or run the risk of disappearing. Years of government protectionism had laid the foundation for the creation of some large conglomerates, but the region’s companies had to face the terrible consequences of the debt crisis in the 1980s and of the serious macroeconomic imbalances that resulted from high instability, high inflation and serious crises in the financial and banking systems of several Latin American countries.
Added to this was the tendency towards liberalization that came about toward the end of the 1980s and which culminated with the radical liberalization and privatization processes of the 1990s. That decade was also witness to the Tequila and Asian crises, which impacted strongly on the region.
In addition to macroeconomic instability and frequent regulatory changes, Latin American companies had to face competition from foreign multinationals. The ones that were able to survive came out of this process stronger and, even more importantly, they were able to buy competitors and assets at low prices.
With the cycle of rising raw materials prices that started in 2002, Latin America is enjoying one of the longest periods of economic growth in its history. This has produced a parallel phenomenon. On the one hand, companies have become more financially sound, and are therefore in a better position to exploit the advantages offered by the market through acquiring resources and assets. On the other hand, domestic demand in the majority of emerging countries has also grown. with The combination of what was learned in the turbulent 1980s and changing 1990s, as well as this decade’s favorable climate, Latin American companies are in a better position than ever to play on a global stage.
II- ATTACK AND DEFENSE
Faced with the opening of the markets, some of today’s Global Latinas began to strengthen for defensive reasons in the 1980s. That was the case of Cemex, which before becoming the giant of today bought a string of Mexican cement companies to block the way of any global cement giants. In other cases, such as Vale and Embraer, the key was the support of Brazil’s government to turn them into international giants
Expansion came at a later stage and was initially implemented through natural markets, those similar to companies’ domestic markets in neighboring countries, or in the case of Mexico, the Hispanic community in the United States.
The next phase was gaining know-how. This search created a virtuous circle, in which companies took advantage of their initial competitive advantages to strengthen and expand internationally. They sought to acquire specific knowhow through purchases or strategic alliances, reincorporated the acquired knowledge into their management and lastly, overhauled themselves. Brazilian company Politec for example acquired a US company specialized in iris recognition, and in doing so acquired knowledge and experience in a niche in which it had no prior presence
III- ATTRIBUTES
The companies covered in the study have a number of characteristics in common. The majority have dominant positions in their domestic markets, reflecting the need to defend themselves from trade liberalization. Secondly, the large majority are family controlled. Without considering potentially negative effects such as the concentration of wealth and power, or a lack of transparency, family control has allowed them to make decisions faster, and thus take better advantage of opportunities.
Furthermore, the study found another common attribute in the strong leadership of the companies’ owners. The personal role of Lorenzo Zambrano in Cemex, of Carlos Slim in América Móvil, and of Gastón Acurio in Astrid y Gastón has been a determining factor in the international expansion of these companies.
Relacionado con el control familiar, el estudio encontró otro atributo común en el fuerte liderazgo de sus propietarios. El rol personal de Lorenzo Zambrano en Cemex, de Carlos Slim en América Móvil o de Gastón Acurio en Astrid y Gastón ha sido determinante en la expansión internacional de estas compañías.
Lastly, innovation has been another of the notable characteristics, whether by intensive application of technology in logistical processes - Cemex is an example - or taking advantage of local biodiversity to develop products and applications in the cosmetics industry, such as the case of Natura.
THE FUTURE
Where are these Global Latinas headed? Those linked to natural resources, such as Vale or Petrobras, will surely continue to strengthen their position in the global market. Those focused on manufacturing or on the consumer, however, will face more complex strategic challenges.
In any case, with the exception of Vale and Petrobras, the “globalization” of these companies must not be overestimated. Although they are making serious efforts to establish themselves on other continents, the majority of their income still comes from their domestic and regional markets. This is particularly true for companies such as Natura and Concha y Toro, whose industries are going through a consolidation process with notable merger and acquisition activities.
Latin American companies nonetheless have a good opportunity to stake claims in the global market. Not all of them will scale the heights of Vale, but they will have the opportunity to consolidate themselves as international actors and lead the way for other companies from the region.
